2024 Moskowitz Prize awarded to research on cost of green capital
It started with 97 and ended with three.
From a field of 97 submitted papers, Climate Capitalists has been named winner of the 2024 Moskowitz Prize at Northwestern University. The award is presented to the authors of high-impact research in sustainable finance. This year’s winning researchers are Niels Joachim Gormsen (University of Chicago Booth School of Business), Kilian Huber (University of Chicago Booth School of Business), and Sangmin S. Oh (Columbia Business School).
Honorable Mentions went to Do Commercial Ties Influence ESG Ratings? Evidence from Moody’s and S&P by Xuanbo Li (City University of Hong Kong), Yun Lou (Singapore Management University), and Liandong Zhang (Singapore Management University); and Corporate Climate Lobbying by Markus Leippold, Zacharias Sautner, and Tingyu Yu, all from University of Zurich.
The annual Moskowitz Prize, now in its 29th year, recognizes research with rigorous empirical methods and high potential impact on sustainability-related business and investment practices. This year’s field of candidate papers was so strong that the judges named not only a winning paper but two Honorable Mention works—only the fifth time that has happened in Moskowitz Prize history.
“Since the pandemic we've seen more and better research in sustainable finance,” says Lloyd Kurtz, founder of the Moskowitz Prize and again one of the judges. “The quality of the papers in the top group is exceptional. The recognized papers stood out because of their clarity and rigor but, even more importantly, because they tell us something new. Each one has significant implications for the field and deserves attention from both academics and practitioners.”
Financial Incentives to Go Green
The winning paper’s authors study a critical question: how to encourage companies to adopt greener practices and reduce emissions.
Carbon taxes remain too low to drive change today, so alternative incentives are required. The researchers examine the cost of green capital as a potential motivator, through a novel approach that analyzes data from firms’ corporate calls with investors—such as mentions of cost of capital—to understand their perceived cost of green capital. They studied 730 US and European firms with emissions large enough to have environmental impact, over the period from 2002 to 2023.
They find that the cost of capital used by greener firms and for greener investments has decreased since 2016, as the public and private sectors have increased attention to climate change, as evidenced by rising assets under management in sustainable funds. As far as numbers, the authors reveal that green firms have a perceived cost of capital that is 1 percentage point lower than that of brown firms.
Overall, the findings suggest that lowering the cost of capital for green investments, for example through directed investments by financial investors and governments, can at least partly facilitate the transition to a green economy, such as by motivating “brown” firms (those currently less likely to emphasize sustainability) to go green. The authors have also launched a “cost of capital” project to understand how firms’ perceived cost of capital and their discount rates are determined, change, and influence corporate investment.
“I was mesmerized by the new cost of capital measure showcased in this study,” says Moskowitz judge Andrew Karolyi. “The finding is what we have needed in the at-times confusing debate of market valuations of environment risk exposures versus carbon emissions, where so much energy has revolved around the cost of capital, but relying on ex post analysis of returns. I predict their findings are going to be well-received by the academy.”
Fellow judge Ravi Jagannathan agrees: “By analyzing disclosures made during earnings calls, the authors collect data on both firm- and project-level hurdle rates, offering a more detailed perspective compared to most studies, which typically focus solely on firm-level estimates. The findings highlight the critical role of cost of capital in directing resources toward green projects across divisions within firms. This demonstrates that activism and government policies promoting sustainability are driving real, measurable changes in corporate behavior.”
Study author Niels Gormsen says: “We are very grateful to the jury and the Moskowitz Prize initiative for their generous support of research in sustainable finance. We hope that research in this area will draw attention to how financial markets influence responses to global challenges, such as climate change.” Co-author Sangmin Oh says, “We're very grateful for the recognition and excited to see growing interest in how market signals affect real investment.”
Co-author Killian Huber notes that “we’ve spent years collecting data on how firms make investment decisions, in particular firms’ perceptions of the cost of the capital that determines their long-run investments. We are grateful to everyone who contributed to this effort, in particular our team of research assistants and professionals.”
Commercial Ties and ESG Ratings
The authors of one of the Honorable Mention papers examined potential conflicts of interest arising from commercial ties among rating agencies, and how those may lead to bias in ESG ratings.
As financial services firms have moved into the ESG-rating business, they have acquired ESG-rating companies, such as Moody’s acquisition of Vigeo Eiris. The new commercial ties may motivate the acquired ESG-rating agencies to curry favor with their parent companies’ credit-rating clients, and that’s what the researchers found by studying over 25,000 ESG ratings: firms with existing credit-rating business with Moody’s and S&P received higher ESG ratings after acquisition than those that lacked such dual relationships, with the extent of the bias related to the intensity of the credit-rating relationship. Moreover, the upward bias diminishes the quality of ESG ratings, which become less informative of future ESG news. The findings have regulatory implications and have been cited in a proposal of EU ESG-ratings regulation.
Kurtz explains, “This paper finds that, as seen in some other fields of finance, commercial ties do appear to influence some assigned ratings. This highlights the importance for practitioners to use multiple rating systems when assessing firms, and of considering potential conflicts when using these data streams.”
Fellow judge Ayako Yasuda says, “This paper asks whether ESG rating providers can perform an impartial function while being owned by a conglomerate that cross-sells other financial products. The findings shed light on a potential conflict of interest between investors who want independent ESG ratings and rating providers who seek synergy between their credit rating and ESG rating businesses—a very timely insight.”
Long-time judge Dan DiBartolomeo states, “After the Global Financial Crisis, multiple credit-rating agencies were fined about $2 billion for negligence in their rating processes. Evidence that similar optimistic biases are infecting ESG rating firms now controlled by credit-rating agencies is troubling in terms of the potential to destroy the credibility of the entire ESG/SRI/CSR field for both investment and regulatory purposes.”
Study author Xuanbo Li explains, “Our findings reveal that commercial ties can undermine the independence and quality of ESG ratings, which are crucial for directing capital to genuinely sustainable practices.” Co-author Yun Lou adds, “Addressing conflicts of interest through enhanced transparency, robust regulation, and stakeholder vigilance can help ensure that ESG ratings accurately reflect corporate ESG performance, ultimately fostering more effective sustainable investment and a higher level of sustainability.”
Co-author Liandong Zhang shares, “Being honored by the Moskowitz Prize judges is a meaningful recognition for our efforts to advance the understanding of sustainable finance. This prestigious award is not only a testament to the quality of our work but also to Singapore Management University’s unwavering commitment to impactful, practice-relevant research with meaningful societal impact.”
Corporate Climate Lobbying
The other Honorable Mention Paper characterizes key dimensions of corporate climate lobbying, including how much firms spend on it and how financial markets price risk related to it.
By studying over 1.2 million quarterly lobbying reports for U.S. public-listed firms from 2001 to 2022, the authors find that spending on anti-climate lobbying—which may hamper global climate policies—averages $277,155 per year per firm engaged in this activity, while pro-climate spending is $184,564, with large increases starting in 2006 and then less expenditure during the Trump Administration. Anti-climate lobbying, they reveal, is concentrated in the Oil and Utilities industries, and large anti-climate lobbyists face more climate-related future incidents, while pro-climate lobbyists undertake more green innovation. Anti-climate lobbyists also try to camouflage lobbying attempts through references only to legislative-bill numbers and other abstract information in lobbying reports. Since 2010, firms with more anti-climate lobbying have earned higher future returns, because investors demand a risk premium for investing in these stocks.
Kurtz says, “We don't know much about firms' political activities because this is not a traditional finance topic, and because firms often go to pains to conceal them. Using a unique dataset of U.S. lobbying reports, this study greatly improves our understanding of the politics of climate finance in the U.S.”
Judge Caroline Flammer describes the paper’s importance, saying: “This is an insightful paper that sheds light on the subtle, yet important role that companies play in shaping climate policy through their lobbying. The authors characterize the firms that engage in anti- and pro-climate lobbying, delve into their motives for doing so, and examine the extent to which their lobbying is priced in financial markets."
Fellow judge Lisa Goldberg states that “The importance of understanding this influence cannot be overstated, and is bound to grow over the next few years.”
Study author Zacharias Sautner says “it is a great honor to receive an Honorable Mention, as the Moskowitz Prize is the world’s leading award for research on sustainable finance, and the jury consists of leading scholars in the field. We also see the recognition by the jury as encouragement for our research journey to understand the determinants and effects of corporate climate lobbying.”
Read the Moskowitz Prize Research Briefs to learn more about the methods, data, results, and real-world applications of the award-winning studies.
Moskowitz Winner Research Brief: Climate Capitalists
Moskowitz Honorable Mention Research Brief: Do Commercial Ties Influence ESG Ratings? Evidence from Moody’s and S&P
Moskowitz Honorable Mention Research Brief: Corporate Climate Lobbying
Support for the Moskowitz Prize
The relevance of the Moskowitz Prize to the business domain is reflected in the financial institutions that sponsor the prize, led by Premier Sponsor Bailard, Executive Sponsor Trillium Asset Management as well as Breckinridge Capital Advisors and Neuberger Berman. All are global leaders in sustainable finance practices, and their support for the Moskowitz Prize incentivizes and motivates the critical academic research helping to shape this field.
More About the Moskowitz Prize at Northwestern University
The Moskowitz Prize is named for Milton Moskowitz (1932-2019), one of the field’s first and most innovative investigators, whose pioneering legacy continues through the Moskowitz Prize.
Moskowitz rose to prominence through his ‘100 Best Companies to Work For’ lists, one of the most influential early incentives for responsible corporate governance, and an early examination of the relationship between responsible practices and financial returns.
In 2020 the Moskowitz Prize became an initiative of Northwestern University’s Kellogg School of Management. First presented in 1996 by the U.S. Social Investment Forum, the Prize was founded by Lloyd Kurtz, currently Senior Portfolio Manager at Montecito Bank and Trust and a Visiting Scholar at Kellogg. The Moskowitz Prize was awarded by UC Berkeley's Haas School of Business from 2005-2019.
Judging for the Moskowitz Prize is completed by a panel of some of the world’s most accomplished sustainable finance researchers and practitioners. In 2023, the panel comprised seventeen judges from universities and financial firms from all over the world, including the Kellogg School at Northwestern University.
Learn more about the Moskowitz Prize here or sign up to receive future Moskowitz Prize announcements.
More About Northwestern University’s Kellogg School of Management
The Kellogg School of Management is a global business school with a vibrant community of faculty, staff, students and alumni who shape the practice of business and organizations around the world. Kellogg brings a blend of theory and practice to its rigorous academic experience, creating a dynamic research and learning environment. Kellogg’s purpose is to educate, equip and inspire brave leaders who build strong organizations and wisely leverage the power of markets to create lasting value.
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