Flow-Driven ESG Returns
Swiss Finance Institute Research Paper No. 21-71
Winner of the Swiss Finance Institute Best Paper Doctoral Award 2022
60 Pages Posted: 21 Oct 2021 Last revised: 20 Nov 2023
Date Written: September 23, 2021
Abstract
I show that the recent returns to ESG investing are strongly driven by price impact from flows towards ESG funds. Using data on institutional trades, I estimate the market's ability to accommodate the demand of ESG funds, which is given by the elasticity of substitution between ESG and other stocks. I show that every dollar flowing towards ESG stocks increases their aggregate market value by $0.7. Using a novel measure of total ESG flows, I estimate an annual flow-driven ESG return of 2.07%. In the absence of flows, ESG funds would have not outperformed the market from 2017 to 2022.
Keywords: sustainable investing, ESG, price pressure, flows, demand elasticity
JEL Classification: G11, G12, G23
Suggested Citation: Suggested Citation