From VoxEU/Centre for Economic Policy Research, August 13:
Investment related to environmental, social, and governance criteria has grown in popularity, but its total amount in unclear. This column uses data on ESG characteristics and institutional equity portfolios to show that ESG-related tilt is about 6% of the investment industry’s assets under management, which is significantly less than commonly reported. ESG tilts are primarily driven by the intensive margin (weights on stocks held) rather than the extensive margin (which stocks are held). Furthermore, institutions tilt more towards green than brown assets, and this effect is driven by the largest institutions.
Achieving the United Nations’ Sustainable Development Goals and Paris climate goals will require a large amount of capital (Volz and Schoenmaker 2022). Some of this capital could potentially be provided by investors using environmental, social, and governance (ESG) criteria. To assess the potential of ESG investing to contribute to policy goals, it seems useful for policymakers to know how much capital is invested according to ESG principles.
ESG investing has clearly exploded in popularity, but its total amount is unclear. For example, according to Bloomberg Intelligence, global ESG assets under management (AUM) surpassed $35 trillion in 2020 (Bloomberg 2022). According to PwC (2022), global ESG assets under management amounted to $18 trillion as of 2021. Perhaps the most-cited figure is $121 trillion, which is the total assets under management of the signatories of the United Nations Principles for Responsible Investment (UN PRI) as of March 2022 (UNPRI 2022). These numbers are vastly different from each other.
Adding up the assets under management of institutions that include ESG in their stated investment policies is simple and transparent. However, it could overstate or understate the total amount of ESG-related investing. Some institutions might engage in greenwashing, while others might use ESG characteristics in their investing without declaring an ESG policy.
How much ESG investing is there, really?
In our paper (Pastor et al. 2023), we quantify ESG-related investing by estimating ESG-related portions of institutions’ equity portfolio weights. We take companies’ environmental, social, and governance characteristics from ratings provided by MSCI, a leading provider. For each institution that has filed the 13F form to the Securities and Exchange Commission (SEC), we estimate how every stock’s ESG characteristics relate to the stock’s weight in the institution’s portfolio. Combining these estimates across stocks gives an institution-level measure of ESG-related tilt. We aggregate those tilts across institutions to estimate the total ESG-related portfolio tilt in the investment industry.We find that the total dollar ESG-related tilt is about 6% of the investment industry’s assets under management in equity investments in 2021. By this measure, there is much less ESG investing than commonly reported. For example, the UN PRI signatories account for 76% of our sample’s assets under management. The 6% number is close to the magnitude of the aggregate ESG tilt throughout our 2012-2021 sample, as we show in Figure 1.
Figure 1 ESG-related tilts....
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