The Impact of ESG Preferences on Stock Borrowing Volumes and Fees

Abstract

Capital market models suggest the existence of a green premium as part of expected stock returns due to investors’ heterogeneous ESG preferences. Green investors systematically overweight green stocks while traditional investors underweight them. If ESG preferences are sufficiently strong, we hypothesize that the resulting green premium is reflected in higher stock borrowing volumes and fees for greener stocks. Based on comprehensive U.S. stock lending data, we show that both very brown and green stocks have higher lending volumes compared to neutral stocks. However, only for green stocks this is accompanied by slightly higher borrowing fees. Thus, we conclude that there is a shortage of green stocks for borrowing due to green investors’ ESG preferences while there is no shortage of brown stocks for borrowing. While these effects are statistically significant, they are of minor economic relevance with a borrowing fee premium for green stocks of one basis point at most. This may be due to ESG preferences and green premium being inherently small or to green investors ignoring the loss of the green premium when lending green stocks.

Keywords: ESG preferences, green premium, stock borrowing fee, borrowing volume

JEL Classification: G12, G13, Q54, Q56