Munnell and Chen: New Developments in Social Investing by Public Pensions

From the Introduction:

Social investing is the pursuit of environmental, social, and governance (ESG) goals through investment decisions. Public pension funds have been active in this arena since the 1970s, when many divested from apartheid South Africa. They have also aimed to achieve domestic goals, such as promoting union workers, economic development, and homeownership. In the mid-2000s, the focus shifted to preventing terrorism and gun violence. This effort included “terror-free” investing in response to the Darfur genocide and to weapons proliferation in Iran. And, after mass shootings in Aurora, CO, and  Newtown, CT, some public funds shed their holdings in gun manufacturers. Most recently, states have renewed the call to divest from Iran and have increasingly targeted fossil fuels to combat climate change.

This brief provides an update of social investing developments and assesses whether, in this changing environment, public funds should engage in this practice. This assessment addresses two questions: 1) can ESG-screened portfolios meet the same return/risk objectives as non-screened portfolios; and 2) are public plans the right vehicle for advancing ESG goals? The discussion proceeds as follows. The first section explores trends in social investing and the U.S. Department of Labor’s guidance on this activity. The second section examines recent state divestment efforts. The third section analyzes the economics of social investing. The fourth section outlines the economic, political, and legal complications. The final section concludes that although social investing may be worthwhile for private investors, lower returns and fiduciary concerns make public pension funds unsuited for advancing ESG goals.

Available for download here.

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Garcia Sanchez: The Hydrocarbon Industry’s Challenge to International Investment Law – A Critical Approach

Abstract:

The research presented here challenges the contemporary view that the international investment regime has a “chilling effect” on host government policies. That critique errs in assuming that the effects of the modern bilateral investment treaties on decision making within host governments have been uniform across states and economic sectors. The main argument presented here is that in developing countries that depend on the oil and gas sectors, the international investment regime rarely deters host government rent-seeking behavior that can harm foreign investors.

In petro-dependent developing nations that have weak institutional capacity the survival of the government becomes tied to its ability to capture the industry’s extraordinary profits. The governments in Bolivia, Venezuela, Nigeria, Kazakhstan, and Ecuador, to name a few, no longer rely on ordinary sources of tax revenue; rather, they tend to get trapped in a “rent dependency curse” in which the governments derive an overwhelming portion of their budgets from natural resource revenues. Their institutional stability depends on their ability to capture the rents, which consequently affects foreign investors’ rights.

The decisions of investment tribunals in investor-state disputes have not changed the  petro-dependent governments’ propensity to choose rent-seeking policies. This phenomenon can be traced to the attitude of investment tribunals toward remedies. In an effort to maintain their reputation, tribunals have been timid in ordering performance remedies—such as ordering a state in violation of its treaty obligation to halt its offending behavior—and instead have relied heavily on compensatory damages. This results in a paradox: in petro-dependent states, host governments violate treaty provisions and capture oil and gas rents for their benefit, and simply use these rent proceeds to pay pecuniary remedies when ordered by international tribunals.

Available for download here.

Freund and Sidhu: Global Concentration and the Rise of China

Abstract:

Using firm level data, we examine how global concentration has changed over the last decade in light of the rise of China. We find that global concentration has declined in most industries, is falling on average across industries, and there is significant churning of firms at the top of the distribution. The enhanced industrial competition is partly attributable to the rising market shares of emerging market firms at the expense of incumbent industry leaders. However, global concentration has risen significantly in a number of industries where Chinese state-owned enterprises dominate, such as mining, metals, real estate and construction. Controlling for mergers and acquisitions and other factors, we find that the presence of a Chinese SOE at the top of the firm-size distribution is associated with a 4 percentage point increase in concentration. The results imply that while the overall impact of China’s rise has been a small but significant increase in global competition, state-ownership has significantly distorted global competition in a number of industries.

 

Available for download here.

Bentivogli and Mirenda: Foreign ownership and performance – evidence from a panel of Italian firms

Abstract:

The paper studies the impact of foreign ownership on a firm’s economic performance. We use a unique panel dataset to test the foreign ownership premium by comparing our sample of firms based in Italy and owned by a foreign subject with a sample of purely domestic firms that, in order to have a proper counterfactual, were selected using propensity score matching. Our difference-in-differences results show the existence of a premium for the size, profitability and financial soundness of the foreign-owned companies. The premium increases with time, is concentrated in the service sector, and disappears if the foreign investor is based in a fiscal haven.

 

Available for download here.