Toggle Mobile Menu
Academic Programs

The returns to sustainable investing are strongly driven by price pressure from flows towards sustainable funds, causing high realized returns that do not reflect high expected returns. The coefficient linking sustainable flows and realized returns is the product of two factors: The deviation of sustainable funds’ portfolios from the market portfolio and the market’s willingness to substitute between green and brown stocks. Using a structural model, I estimate that withdrawing $1 from the market portfolio and investing it in the representative ESG fund increases the aggregate value of green stocks by $1.5. The structural price pressure estimates are highly correlated with empirically observed ESG returns. Under the absence of flow-driven price pressure, the aggregate ESG industry would have underperformed the market from 2016 to 2021. I support the structural estimates with reduced-form evidence, showing that mandate-driven portfolio additions by ESG mutual funds significantly boost the prices of green stocks.