Abstract: We estimate financial institutions' portfolio tilts that relate to stocks' environmental, social, and governance (ESG) characteristics. In 2021, ESG-related tilts total 6% of the investment industry's assets and average 22% of institutions' total portfolio tilts. ESG tilts are larger for less-volatile stocks and for institutions with smaller size and greater active share, consistent with our theoretical predictions. Significant ESG tilts arise from the choice of stocks held and, especially, the weights on stocks held. The largest institutions tilt increasingly toward green stocks, while other institutions and households tilt increasingly brown. UNPRI signatories and European institutions tilt greener, banks browner.
Dong Lou, London School of Economics and Political Science
Xudong Wen, Hong Kong University of Science & Technology
Mingxin Xu,
Abstract: We develop a novel method to infer details of intra-quarter trading of individual mutual funds. Although mutual funds report their holdings once every quarter, they are required to report their returns every day. After a mutual fund executes a trade on day t, its reported portfolio return should further deviate from its quarter-end-holdings-based return. This sudden jump in return deviation allows us to infer the transaction date and amount. We apply our method to studying the strategic trading behavior of mutual funds around the turn of each quarter. We find strong evidence of quarter-end ESG-rating manipulation in the post- 2015 period: mutual funds buy high-ESG stocks and sell low-ESG stocks right before quarter ends, and reverse their trades immediately at the beginning of the next quarter. This trading pattern is concentrated among mutual funds right around the cutoff of four and five ESG rating stars, which have the strongest incentives to boost their ESG performance. These trades also affect prices: high-ESG stocks outperform low-ESG stocks right before quarter ends, and yet underperform at the beginning of the next quarter.
Abstract: We study equilibrium asset prices in a model where investors favor ``green'' over ``brown'' goods. We show that demand elasticity of goods crucially affects assets' riskiness. When demand elasticity is high, brown assets are safer than green, because they hedge against consumption risk. The opposite holds when goods' demand elasticity is low. Our model therefore predicts that the ``green minus brown'' stock return spread (green premium) varies in the cross section and increases in the price elasticity of demand. We test this novel prediction on US stocks and find that over the 2012--2022 period the annual green premium is 11.7% for firms with high demand elasticity, while it is much smaller and insignificant for firms with low demand elasticity. The high green premium for high demand elasticity firms is robust to standard risk adjustments and to alternative measures of demand elasticity; it cannot be explained by unanticipated shocks to investors' environmental concerns, and remains strong after using option-implied measures of expected returns. These findings underscore the critical role of goods' demand elasticity for understanding the impact of responsible consumption on asset prices.
Discussant: Burton Hollifield, Carnegie Mellon University
