Financial markets

Sudipto Dasgupta, Thanh Huynh, Ying Xia, 08 December 2021

Whether socially responsible investors have any impact on the environmental, social, and governance policies of portfolio firms has become a much-debated issue. This column shows that firms reduce emissions at their local plants following enforcement actions by the US Environmental Protection Agency against nearby plants of firms operating in the same market, and that the emissions reduction is twice as large if a nearby ‘socially responsible’ mutual fund owns shares of the parent firm of the peer plants. The threat of exit by these funds appears to have real consequences for how the local plants respond to the enforcement action.

Winta Beyene, Manthos Delis, Kathrin de Greiff, Steven Ongena, 04 December 2021

One of the concerns in the debate on climate change is whether financial flows contribute to the reduction of emissions. This column looks at the role bond market-based and bank-based debt plays in the allocation of resources to fossil fuel in the context of the risk of stranded assets. The authors show that banks continue to provide financing to fossil fuel firms that the bond market would not finance as long as they do not price the risk of stranded assets. In this setting, stranded assets risks may have shifted to large banks.

Sebastian Stöckl, Martin Rode, 30 November 2021

Financial markets have shown contradictory reactions to the formation of populist administrations. This column, part of the Vox debate on populism, examines whether there is any systematic reason behind the radically different outcomes, using data for 331 elections in 41 EU and OECD countries. The immediate uncertainty introduced into financial markets by an increase in populist vote shares varies according to the populist host ideology. Markets are mostly suspicious of left-wing populism but view the electoral success of right-wing populist parties as unequivocally favourable, possibly because of the tendency for the political and economic elite to collude.

Rui Albuquerque, Yrjo Koskinen, Raffaele Santioni, 23 November 2021

How did the stock market crash caused by Covid-19 affect different asset classes and fund types? This column studies the trading behaviour of actively managed equity mutual funds in the US during the crisis and finds that funds with high environmental, social, and governance ratings helped to stabilise the market, but other funds also provided support for ESG stocks. All funds experiencing inflows increased their net purchases, but this behaviour was stronger for ESG funds. Non-ESG funds experiencing outflows increased their net sales, but this was limited to their holdings of non-ESG stocks.

Georgios Georgiadis, Gernot Müller, Ben Schumann, 17 November 2021

In times of heightened global risk, investors flock to the dollar as their capacity or willingness to bear risk declines. As a result, the dollar appreciates. This column examines the effects of global risk shocks and the dollar’s role in the international adjustment to such shocks, finding that appreciation of the dollar amplifies the adverse effect of global risk shocks considerably. Policies that stabilise the dollar in the face of global risk, such as the liquidity provision by the Federal Reserve in response to the COVID-19 pandemic, can help stabilise global economic activity.

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