This week, we want to highlight a recently published paper from HBS on what the actual data on stock holdings says about “How do Investors Value ESG?” through a revealed preferences approach. Are investors willing to sacrifice returns in exchange for sustainability linked benefits? The findings are quite interesting, so we would suggest a full read. In the meantime, here are five of their most relevant findings:
- “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.”
- “The value that investors have placed on ESG has more than tripled over the period from 2019 to 2022, starting at 9 basis points and rising to 28 basis points in four years.”
- “Bloomberg projects that ESG will account for as much as a third of global AUM in 2025.” (This implies up to $53 trillion in ESG investments).
- “On average the overlap in holdings in our sample between ESG and matched non-ESG funds is 68 percent for US broad market funds.”
- “The correlation of sustainability ratings from Morningstar and Refinitiv, the two prominent data providers for ESG investors… is only 0.17.”
So, what does this mean?
Final investors are clearly willing to pay more for ESG-labeled investment options (or at least they have been willing in the past few years). But will this continue if the funds’ overlap with traditional (cheaper) funds is as high as it is right now? We doubt it.
The way we see this going forward is that one of two things will happen: either institutional investors will up their ESG game and truly offer differentiated portfolios (possibly more thematic, so that final investors can put their money towards things they truly believe in), or the fee differential will shrink over time. Or even possibly a combination of both.
Note that we do not expect a scenario where ESG stops being in the picture altogether. We believe that sustainability practices bring many benefits to both corporations and investors. But we do think how this is currently flowing into investment practices will still be fine-tuned in years to come. And this will probably open investor’s doors to companies with very differentiated sustainability practices as well (which right now is not that evident). Time will tell.
I hope you found this interesting. As usual, if there is anything we can help you with, or if there is an ESG topic you would like to know more about, please let us know.
CEO, Miranda ESG
Contacts at Miranda Partners