Demand for ESG

We quantify the value investors place on environmental, social, and governance (ESG) objectives over time and space using a revealed preference approach. Our approach measures investors’ willingness to pay for ESG-oriented index funds in exchange for their financial and non-financial benefits. We find that the premium that investors assign to index funds with an ESG mandate rose from 3 basis points in 2019 to a peak of 17 basis points in 2020, before turning negative in 2022 and falling to negative 33 basis points in 2023. The boom and bust in willingness to pay is more pronounced among institutional investors (versus retail investors) and equity investors (versus fixed income investors). In contrast to US investors, European investors’ willingness to pay for ESG started at a higher level in 2019 and remains strongly positive in 2023. Although differences in fund holdings explain some of the demand for ESG-oriented funds, much of it is driven by the ESG label itself, which may leave investors susceptible to greenwashing. When we apply our framework to the cross-section of 401(k) participant portfolios, we find that investors in climate-conscious areas and low-emission industries exhibit higher demand for ESG. We offer tentative conclusions on how value is split among investors, intermediary profits, and firm costs of capital.