Institutional Investors and ESG Preferences

Abstract

We examine the effect of multiple environmental, social and governance (ESG) scores on
institutional investor ownership of firms and investor portfolio weightings. We are also the
first to analyze the three individual components of ESG rankings to estimate the relative preferences of institutional investors. Using a unique panel dataset covering US companies
and institutional investor portfolios over the 2010-2019 period, we find that while investors
are driven to add high-quality ESG companies to their portfolios, there is a negative relationship with ESG when it comes to taking large ownership stakes. Furthermore, ESG scores are negatively related to the portfolio weightings of institutional investors, which raises concerns of greenwashing. Our analysis of individual ESG scores points to significantly larger effects of G scores in terms of holdings, and G is the only score with no negative impact on portfolio weightings. Finally, in support of systematic stewardship theory, top institutional investors allocate higher proportions of their portfolios to firms with high ESG ratings. Our results are robust to the use of a difference-in-differences analysis addressing endogeneity concerns.

Keywords: ESG, Sustainable Finance, Institutional Investors, Financial Performance, Disclosure

JEL Classification: G12, G14, G15, G23, G32, M1