How Do Investors Value ESG?

54 Pages Posted: 13 Dec 2022

See all articles by Malcolm P. Baker

Malcolm P. Baker

Harvard Business School; National Bureau of Economic Research (NBER)

Mark Egan

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

Suproteem K. Sarkar

Harvard University

Multiple version iconThere are 2 versions of this paper

Date Written: November 22, 2022

Abstract

Environmental, social, and governance (ESG) objectives have risen to near the top of the agenda for corporate executives and boards, driven in large part by their perceptions of shareholder interest. We quantify the value that shareholders place on ESG using a revealed preference approach, where shareholders pay higher fees for ESG-oriented index funds in exchange for their financial and non-financial benefits. We find that investors are willing, on average, to pay 20 basis points more per annum for an investment in a fund with an ESG mandate as compared to an otherwise identical mutual fund without an ESG mandate, suggesting that investors as a group expect commensurately higher pre-fee, gross returns, either financial or non-financial, from an ESG mandate. Our point estimate has risen from 9 basis points in 2019 when our sample begins to as much as 28 basis points in 2022. When we incorporate the possibility that investors are willing to accept lower financial returns in exchange for the psychic and societal benefits of ESG, when we consider that the holdings of ESG and non-ESG index funds overlap, when we measure the ESG ratings of these holdings, and when we focus on 401(k) participants who report being concerned about climate change or who work in industries with lower levels of emissions, we find that the implicit value that investors place on ESG stocks is higher still. A simple model of supply suggests that the large majority of these benefits accrue to investors and firms, with intermediaries capturing 5.9 basis points in fees, half of which reflect higher markups.

Keywords: ESG, Index Funds, Demand Estimation

JEL Classification: G11, G50, Q50

Suggested Citation

Baker, Malcolm P. and Egan, Mark and Sarkar, Suproteem, How Do Investors Value ESG? (November 22, 2022). Available at SSRN: https://ssrn.com/abstract=4284023 or http://dx.doi.org/10.2139/ssrn.4284023

Malcolm P. Baker

Harvard Business School ( email )

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HOME PAGE: http://www.people.hbs.edu/mbaker

National Bureau of Economic Research (NBER)

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Mark Egan (Contact Author)

Harvard University - Business School (HBS) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Suproteem Sarkar

Harvard University

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Cambridge, MA 02138
United States

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