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Demand for ESG

Author

Listed:
  • Malcolm Baker
  • Mark L. Egan
  • Suproteem K. Sarkar

Abstract

We quantify the value investors place on environmental, social, and governance (ESG) objectives over time and space using a revealed preference approach. Our approach measures investors’ willingness to pay for ESG-oriented index funds in exchange for their financial and non-financial benefits. We find that the premium that investors assign to index funds with an ESG mandate rose from 3 basis points in 2019 to a peak of 17 basis points in 2020, before turning negative in 2022 and falling to negative 33 basis points in 2023. The boom and bust in willingness to pay is more pronounced among institutional investors (versus retail investors) and equity investors (versus fixed income investors). In contrast to US investors, European investors’ willingness to pay for ESG started at a higher level in 2019 and remains strongly positive in 2023. Although differences in fund holdings explain some of the demand for ESG-oriented funds, much of it is driven by the ESG label itself, which may leave investors susceptible to greenwashing. When we apply our framework to the cross-section of 401(k) participant portfolios, we find that investors in climate-conscious areas and low-emission industries exhibit higher demand for ESG. We offer tentative conclusions on how value is split among investors, intermediary profits, and firm costs of capital.

Suggested Citation

  • Malcolm Baker & Mark L. Egan & Suproteem K. Sarkar, 2022. "Demand for ESG," NBER Working Papers 30708, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30708
    Note: AP CF
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    Citations

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    Cited by:

    1. Zach Y. Brown & Mark L. Egan & Jihye Jeon & Chuqing Jin & Alex A. Wu, 2023. "Why Do Index Funds Have Market Power? Quantifying Frictions in the Index Fund Market," NBER Working Papers 31778, National Bureau of Economic Research, Inc.
    2. Gormsen, Niels Joachim & Huber, Kilian & Oh, Sangmin S., 2024. "Climate capitalists," Working Paper Series 2990, European Central Bank.
    3. Alberto Montagnoli & Karl Taylor, 2024. "Who Cares about Investing Responsibly? Attitudes and Financial Decisions," Working Papers 2024010, The University of Sheffield, Department of Economics.
    4. Bert Van Roosebeke & Ryan Defina, 2023. "The Role of Climate in Deposit Insurers' Fund Management: More Than a Financial Risk Management Factor?," IADI Survey Briefs 5, International Association of Deposit Insurers.
    5. Michele Fioretti & Victor Saint-Jean & Simon C. Smith, 2024. "NGO Activism: Exposure vs. Influence," Papers 2411.06875, arXiv.org, revised Nov 2024.
    6. Gong, Xiaomin & Xie, Fei & Zhou, Zhongsheng & Zhang, Chenyang, 2024. "The enhanced benefits of ESG in portfolios: A multi-factor model perspective based on LightGBM," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).
    7. Yin, Zhichao & Li, Xinqi & Si, Dengkui & Li, Xiaolin, 2023. "China stock market liberalization and company ESG performance: The mediating effect of investor attention," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1396-1414.
    8. Fatemi, Ali & Fooladi, Iraj & Zhao, Yonggan & Ma, Zongming, 2024. "On the superior performance of SRI funds," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 567-581.
    9. Chi Zhang & Xinyang Li & Andrea Tamoni & Misha Beek & Andrew Ang, 2024. "ESG risk and returns implied by demand-based asset pricing models," Journal of Asset Management, Palgrave Macmillan, vol. 25(3), pages 203-221, May.
    10. Tristan Jourde & Arthur Stalla-Bourdillon, 2024. "PEnvironmental Preferences and Sector Valuations," Working papers 964, Banque de France.
    11. Michele Costa, 2023. "The evaluation of the effects of ESG scores on financial markets," Working Papers wp1189, Dipartimento Scienze Economiche, Universita' di Bologna.
    12. Lee, King Fuei, 2023. "The Role of Catering Incentives in ESG Disclosure," MPRA Paper 120930, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G5 - Financial Economics - - Household Finance
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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