Flow-Driven ESG Returns

43 Pages Posted: 21 Oct 2021 Last revised: 26 Oct 2021

See all articles by Philippe van der Beck

Philippe van der Beck

Ecole Polytechnique Fédérale de Lausanne

Date Written: September 23, 2021


I show that the performance of ESG investments is strongly driven by price-pressure arising from flows towards sustainable funds, causing high realized returns that do not reflect high expected returns. The coefficient linking ESG flows and realized returns is the product of two factors: The deviation of green funds' portfolios from the market portfolio and a flow multiplier matrix that is the inverse of the market's demand elasticity of substitution between stocks. Empirically, withdrawing 1 dollar from the market portfolio and investing it in the representative ESG fund increases the aggregate value of high ESG-taste stocks by 2-2.5 dollars. Under the absence of flow-driven price pressure, the aggregate ESG industry would have strongly underperformed the market from 2016 to 2021. Furthermore, the positive alpha of a long-short ESG taste portfolio becomes significantly negative.

Keywords: sustainable investing, ESG, price pressure, flows, demand elasticity

JEL Classification: G11,G12,G23

Suggested Citation

van der Beck, Philippe, Flow-Driven ESG Returns (September 23, 2021). Swiss Finance Institute Research Paper No. 21-71, Available at SSRN: https://ssrn.com/abstract=3929359 or http://dx.doi.org/10.2139/ssrn.3929359

Philippe Van der Beck (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900

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