05 April 2023

CEPR's Brandon, Krueger: Institutional investors and responsible investing

...including what motivates responsible investing, the effectiveness of specific responsible strategies, and whether investors who promise to invest responsibly actually ‘walk the ESG talk’. 

There is growing interest globally in responsible investing, whereby institutional investors incorporate environmental, social, and governance issues into their investment processes. The column introduces the second LTI Report, in which the authors explore a series of issues relating to the responsible equity and fixed-income investment choices of institutional investors, including what motivates responsible investing, the effectiveness of specific responsible strategies, and whether investors who promise to invest responsibly actually ‘walk the ESG talk’. 

There is growing interest globally in responsible investing, whereby institutional investors incorporate environmental, social, and governance (ESG) issues into their investment processes. For instance, the Global Sustainable Investment Alliance estimates that in 2020, assets amounting to $35 trillion were invested according to ESG principles, a figure that has almost tripled since 2012 (GSIA 2013, 2021). In the second LTI Report (Gibson Brandon and Krueger 2023), we explore a series of issues relating to the responsible equity and fixed-income investment choices of institutional investors.

For instance, we use data for a global sample of institutional investors consisting of both asset owners (e.g. pension funds, insurance companies) and investment managers (e.g. banks, asset management companies, hedge funds) to study what drives institutional investors’ ESG performance at the equity portfolio level. To quantify the ESG performance of an institutional investor, we calculate ESG performance measures at the equity portfolio level. Intuitively, our ESG performance measures capture the ESG characteristics of the average holding in an institutional investor’s stock portfolio.

Figure 1 shows that larger institutions (in terms of assets under management, the number of stocks, or the number of invested industries) as well as more long-term oriented institutions (in terms of portfolio turnover) tend to exhibit better portfolio-level ESG performance...

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