What is the best way to measure the relatively recent phenomenon of ESG (environmental, social, and governance) investing? What does it mean to say that ESG investing reached $35 trillion global assets under management (AUM) in 2020? How much do institutions’ portfolio choices relate to companies’ ESG characteristics? Do they really “care” about ESG investments or are they making calculated investment decisions? How have these ESG-related portfolio tilts changed over time? Which investors tilt green, and which ones make the offsetting brown tilts?
This working paper takes a novel approach to answering these and related questions. Rather than summing AUM or screening investment policies, the authors estimate ESG-related portions of institutions’ portfolio weights, or the percentage of an investment portfolio comprised by a particular type of holding. Portfolio weight is calculated by dividing the stock value by the total portfolio value and multiplying by 100 to get a percentage. For example, the portfolio weight of an asset worth $10,000 in a $100,000 portfolio is 10%.
The authors focus on equity portfolios, using holdings from 13F filings, which are quarterly reports required by the Securities and Exchange Commission. For each institution, the authors begin by estimating how every stock’s ESG characteristics relate to the stock’s weight in the institution’s portfolio, controlling for the stock’s other characteristics. Combining these estimates across stocks gives an institution-level measure of ESG-related tilt. The authors then aggregate those tilts across institutions to estimate the total ESG-related portfolio tilt in the investment industry, to find the following: