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  • 2022
  • Working Paper
  • HBS Working Paper Series

How Do Investors Value ESG?

By: Malcolm Baker, Mark Egan and Suproteem K. Sarkar
  • Format:Print
  • | Language:English
  • | Pages:56
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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

Investment; Investment Portfolio; Corporate Social Responsibility and Impact; Business and Shareholder Relations; Environmental Sustainability; Governance; Financial Services Industry; United States

Citation

Baker, Malcolm, Mark Egan, and Suproteem K. Sarkar. "How Do Investors Value ESG?" NBER Working Paper Series, No. 30708, December 2022. (Harvard Business School Working Paper, No. 23-028, November 2022.)
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About The Authors

Malcolm P. Baker

Finance
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Mark L. Egan

Finance
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More from the Authors

    • December 2022
    • Review of Financial Studies

    Conflicting Interests and the Effect of Fiduciary Duty: Evidence from Variable Annuities

    By: Mark Egan, Shan Ge and Johnny Tang
    • November 2022 (Revised December 2022)
    • Faculty Research

    Dicerna

    By: Malcolm Baker, Ishita Sen and Jonathan Wallen
    • Review of Economic Studies

    Recovering Investor Expectations from Demand for Index Funds

    By: Mark Egan, Alexander J. MacKay and Hanbin Yang
More from the Authors
  • Conflicting Interests and the Effect of Fiduciary Duty: Evidence from Variable Annuities By: Mark Egan, Shan Ge and Johnny Tang
  • Dicerna By: Malcolm Baker, Ishita Sen and Jonathan Wallen
  • Recovering Investor Expectations from Demand for Index Funds By: Mark Egan, Alexander J. MacKay and Hanbin Yang
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