Accounting for Past Return to ESG Stocks

Does past performance of Environmental, Social, and Corporate Governance (ESG) stocks derive mostly from shift in demand from other stocks to ESG stocks? In his September 2021 paper entitled “Flow-Driven ESG Returns”, Philippe van der Beck examines whether flow of investor dollars toward ESG mutual funds explains aggregate performance of ESG stocks, as follows:

• Construct an ESG portfolio that aggregates quarterly holdings of U.S. equity mutual funds that assert sustainability mandates.
• Measure perceived sustainability of each stock by calculating the deviation of its ESG portfolio weight from its market portfolio weight.
• Estimate the price pressure due to a flow of dollars into ESG mutual funds.
• Combine perceived stock sustainability and price pressure to explore sensitivity of past ESG portfolio returns to level of dollar flow into ESG mutual funds.

Using mutual fund descriptions (with respect to importance of sustainability in investment decisions) and quarterly Form 13F mutual fund holdings data during 2000 through 2020, and underlying stock prices through the first quarter of 2021, he finds that:

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