Shema Mitali, Assistant Professor of Sustainability Finance and Researcher at SKEMA Business School, currently works on the relationship between ESG criteria and discourse, and investor behaviour. He tells us more about his work, what surprised him the most and how his research is impacting society.

Could you tell us more about your field of research, particularly sustainable finance?

Currently, my research primarily centres on investments as well as the use of text data for various research questions, with a particular emphasis on sustainable finance. For example, in collaboration with co-authors, we analyse the prevalence of environmental, social, and governance (ESG) terms in prospectuses distributed to investors by investment firms. Our findings indicate that investors react positively to ESG discussions, allocating capital to investment funds that mention ESG terms, even when investment companies do not invest in firms with strong ESG records. This observation suggests that some investment companies may be engaged in greenwashing practices. In other climate finance-related work, we investigate the motivations behind firms issuing green bonds, which is capital raised from investors for green projects, despite limited financial incentives in terms of borrowing costs. It appears that firm managers’ interest in the stock price plays a key role in the decision to issue green bonds, in addition to considerations related to carbon taxes. Managers internalise the positive impact of green bond issuance on a firm’s stock price as it signals the company’s commitment to sustainability.

What results surprised you the most?

An interesting result from our research reveals that investors are highly sensitive to “cosmetic”-ESG metrics, like the presence of environmentally related words in fund prospectuses, while failing to recognise more concrete ESG indicators, such as the presence of large carbon emitters in portfolios. Another interesting result shows that firm managers, even when prioritising short-term objectives like the stock price, make decisions that benefit the environment, including issuing certified green bonds that lead to a reduction of CO2 emissions. These decisions are rewarded by investors in today’s markets as they exhibit stronger preferences for sustainability. This shows that, in this specific case, short-term goals can be aligned with long-term environmental objectives.

What is the research you are currently carrying out?

A significant amount of textual data is available to researchers, but it has remained relatively underexplored in financial economics until recently, thanks to the availability of large datasets and new models tailored to such text data. This presents a valuable opportunity for empirical researchers in this area. Currently, I am applying text analysis methods to explore how text information influence economic agents’ decisions in various context. For instance, I investigate why individual investors allocate their capital to investment firms that promise to deliver strong performance delivery but fail to meet these promises, as evidenced by historical data. Can communication by investment companies shed light on the ‘active fund puzzle,’ or the phenomenon where actively managed mutual funds in the U.S. have expanded despite delivering inferior performance? Results indicate that poorly performing funds seem to communicate differently and that the use of certain terms makes investors keep their capital in underperforming funds for longer that they should.

How does this study impact society at large?

Understanding how textual information persuades investors to keep their capital in underperforming funds is crucial, as one in every two households in the U.S. has savings invested in these costly yet value-destroying funds. Improving their capital allocation decisions has the potential to improve welfare and households’ financial situation, as households could reallocate to other investment vehicles that are either cheaper or better performing.

Similar impact also applies to the study on the use of ESG-related terms by investment companies. Since the use of ESG-related terms significantly influences investors’ capital allocation decisions, it is crucial to quantify the magnitude of this shift in allocation. Quantifying the capital directed towards funds and ultimately companies with environmentally appropriate goals can have significant implications for multiple stakeholders. Our research shows that investors are highly sensitive to textual information related to ESG. As regulators strive to safeguard investors from greenwashing practices, our research suggests that ESG shouldn’t be mentioned in fund prospectuses without providing additional information on how it is translated into portfolio holdings. This approach could ultimately prevent funds from greenwashing and ensure the proper allocation of capital to firms with environmental policies, potentially leading to a positive impact.

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