Measuring Institutional Pressure for Greenness: A Demand System Approach

Abstract

How should we quantify the institutional price pressure induced by demand for green stocks? We use the equity holdings of institutional investors and the demand system approach to answer this question. We devise and estimate a firm-level quantity, institutional pressure for greenness, that measures the price pressure a firm receives from its institutional owners to become more environment-friendly. We find that this quantity has a positive and significant relationship with future improvement in a firm’s carbon intensity, but not with other measures of a firm’s environment performance. We also find that investors with high portfolio-level environment scores do not necessarily contribute to higher institutional pressure. Instead, investors who are price-inelastic and display a positive portfolio tilt towards greenness – those who overweight greener stocks even after controlling for other characteristics – contribute the most to institutional pressure.

Keywords: ESG, Green Investing, Demand System, Institutional Investors

JEL Classification: G10, G11, G20