Big Finance Is Going Green. Smaller Finance, Not So Much

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.