The financial media increasingly focuses on the growth in green investing. According to Bloomberg Intelligence, $35 trillion in global assets in 2020 were managed based on environmental, social, and governance considerations, an amount that is on course to reach $50 trillion by 2025.

But while large financial institutions have increased equity holdings with ESG characteristics, other investors have moved in the opposite direction, according to Chicago Booth’s Lubos Pastor and University of Pennsylvania’s Robert F. Stambaugh and Lucian A. Taylor.

The researchers analyzed institutions that managed at least $100 million in US equities between 2012 and 2021 and were thus required to submit quarterly 13F filings to the US Securities and Exchange Commission. This group included money managers, banks, insurers, pension funds, and endowments. They then calculated how green the group was based on members’ holdings of about 2,000 stocks whose ESG and non-ESG characteristics were available. The ESG profiles for individual equity holdings were provided by MSCI, a widely used market-data provider. The study takes as a given that going green is relative and that the market is neutral overall in that respect.

To estimate how far institutions were tilting green, the researchers controlled for factors such as a style preference for large-cap growth stocks, which correlates with but does not necessarily represent a preference for ESG stocks. They also adjusted for the market’s migration toward index investing, as owning a market portfolio is by assumption inherently ESG neutral. They then focused on the active asset managers that filed 13Fs, whose numbers grew from 1,731 to 3,086 during the study period.

The researchers find that each 13F filer’s ESG tilts ranged from a high of 7 percent of asset value to a low of 2 percent. At the study’s conclusion in 2021, the ESG tilt was equal to almost 6 percent of the group’s entire portfolio value.

Large portfolios overweight green stocks

The US financial industry’s positive and increasing “green tilt” on environmental, social, and corporate governance considerations is due to investment decisions at the largest institutions, according to the research.

There were notable differences among big institutions. Using a measure of overall ESG holdings, Pastor, Stambaugh, and Taylor find that banks were distinctly less green than asset managers, insurance companies, pension funds, and endowments. Among these groups, insurers were the greenest.

Because of the total market’s overall neutrality, a green tilt by 13F filers means that other investors must tilt brown (toward investments with unfavorable ESG characteristics). The researchers find that as the big investors’ green leanings increased during the study period, the holdings of other investors—including households and institutions falling below the $100 million 13F threshold—became browner over time.

The researchers also looked at the methods 13F filers used to lean in one direction or the other. They find that fund managers achieved their green tilts by eliminating some non-ESG stocks. However, their main strategy involved reducing holdings of brown stocks without divesting of them entirely.

And although environment is often considered the main focus of ESG, the tilt remained similar toward all three components, demonstrating that big institutions responded equally to environmental, social, and governance factors, Pastor, Stambaugh, and Taylor find.

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