Given all the coverage of ESG investing in the past few years, you could be forgiven for believing the sector had made big strides. But to the extent that “green tilts” in investment portfolios are a reality, they are driven almost entirely by BlackRock and a few other large institutional investors, and hardly at all by the rest of the banking industry.
So finds a recent study that looked into these investment tilts. For starters, Wharton professors Luke Taylor and Robert Stambaugh and University of Chicago professor Lubos Pastor, who conducted the study, were—like so many of us, myself included—perplexed by news reports over the past few years, including this Bloomberg story, showing that “global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third in...total assets under management.”
Rather than taking the headlines at face value, they questioned them. They looked at the ESG credentials and weight of every stock held by investment institutions and calculated the resulting “green” or “brown” tilt. Their headline finding? “ESG-related tilts” totaled only 6% of the investment industry’s assets under management in 2021.
(For clarity: A stock portfolio has an “ESG-related” or “green tilt” when it overweights green stocks or underweights brown stocks; it has a brown tilt if the opposite is true. Whether a stock is considered green or brown depends on its ESG characteristics. For example, a green stock could be a company with a lower-than-average CO2 intensity or relatively high score on social and governance factors.)
The finding gives credence to the common criticism that ESG investment marketers often grossly exaggerate the green credentials of their portfolios. Indeed, with a 6% “green tilt,” the authors point out, “the total amount of ESG investing is...much smaller than the aggregate [assets under management] of institutions that proclaim to invest in line with ESG-related principles.”
But a second finding in the paper turns that insight on its head, or at least shines a different light on the ESG industry’s most vocal proponents.
Indeed, the green investment tilt, the authors found, was almost exclusively due to a few of the largest investment institutions. Some did make a significant shift. BlackRock, notably, had a 49% green tilt in its active shares. Four more of the largest institutions, including Vanguard and StateStreet, had a green tilt of more than 20%.
If the total industry tilted only 6%, it is because of two factors. One, the recent rise in popularity of index investing, which often has no green bias whatsoever.
Two, unlike BlackRock, StateStreet, and Vanguard (and European institutions such as Crédit Agricole, UBS, and Pictet), many other players made a much smaller shift towards ESG stocks, effectively erasing progress by industry leaders. Generally speaking, the smaller the institution, the less of a green shift in the past decade. But even big banks like JPMorgan Chase and Bank of America hardly made a green turn. Quite a revelation.
These findings should prompt banks to clearly define what exactly they mean by ESG investing and be transparent about the criteria they use to label a portfolio green. And they remind us that data can provide a much clearer picture of the industry and the strides it is—or isn't—truly making.
ESG investing will be a prominent topic at the Impact Initiative next month in Atlanta. If you’d like to join us for this two-day event, sign up here.
Peter Vanham
Executive Editor, Fortune
peter.vanham@fortune.com
This edition of Impact Report was edited by Holly Ojalvo.
