Working Paper: NBER ID: w30708
Authors: Malcolm Baker; Mark L. Egan; Suproteem K. Sarkar
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; investor preferences; index funds; willingness to pay
JEL Codes: G0; G11; G5; Q50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investors willingness to pay for ESG-oriented index funds (G23) | Higher perceived value of ESG investments (G19) |
| Increase in willingness to pay for ESG funds (G19) | Higher expected pre-fee gross returns from ESG mandates (G19) |
| Geographical variations in investor preferences (G40) | Differences in willingness to pay for ESG funds (G19) |
| Overlap of holdings between ESG and non-ESG funds (G23) | Implicit value investors place on ESG stocks (Q51) |
| Higher fees for ESG funds (G19) | Higher markups for intermediaries (D40) |
| Higher expected pre-fee gross returns from ESG mandates (G19) | Higher willingness to pay for ESG funds (G19) |
| Time variation in investors willingness to pay for ESG (G19) | Future returns on ESG funds (G17) |