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Cited by 0Sustainable Finance and Green BondsCorporate Social Responsibility ReportingFinancial Markets and Investment Strategies

The origins of ESG demand: Evidence from retail and institutional investor responses to environmental rankings

Open access
You, Leyuan, Payne, Janet·2026·Review of Financial Economics
DOI 10.1002/rfe.70039
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Abstract

Abstract This paper examines the origin of the demand for corporate environmental responsibility in capital markets by comparing the responses of retail and institutional investors to environmental information releases. Employing public green rankings for S&P 500 firms, we show that retail investors respond positively to increases in public rankings by paying a green premium and increasing their holdings during the period when environmental, social and governance (ESG) investment was becoming increasingly popular. Conversely, increases in private green scores do not result in significant market reactions, indicating that institutional investors did not emphasize environmental protection in their investment decisions. A quasi‐natural experiment and robustness tests with institutional holdings provide additional support for this finding. This effect has disappeared in recent years, as demand from retail investors has been met by institutional options. Overall, this study provides evidence that retail investors are the primary drivers of early demand for environmental responsibility, providing important policy implications to incentivize institutional investors.

AI snapshot

Written from the paper’s full text.

TL;DR

This paper argues that retail investors, rather than institutions, were the main early source of demand for corporate environmental responsibility. Using public Newsweek green rankings versus private Bloomberg environmental scores for S&P 500 firms, it finds retail-driven green premia and ownership shifts in 2009–2016, with institutional responses appearing later.

Key findings

  • During 2009–2016, institutional holdings fell for firms in the top 50 public green rankings after rankings were released, implying retail investors increased their holdings; the negative relation was stronger for green firms than brown firms.
  • Public green rankings produced a positive market reaction: top green firms earned a 5% green premium during the ranking year, while brown firms had about 8% lower excess returns in the year before the ranking.
  • Private Bloomberg environmental scores did not generate significant institutional-holding or market reactions, supporting the interpretation that institutions did not emphasize environmental performance in this early period.
  • In the 2017–2023 contrast period, institutional investors increased holdings of brown firms after public rankings and reduced holdings of brown firms after private Bloomberg scores; the early green premium largely disappeared.

Methods

  • The study compares investor responses to public environmental information (Newsweek S&P 500 green rankings) and private environmental information (Bloomberg environmental scores) for S&P 500 firms, using 2009–2023 data with 2009–2016 as the primary window and 2017–2023 as a contrast period.
  • Data include Newsweek green rankings/scores, Bloomberg environmental and ESG scores, CRSP returns and firm characteristics, COMPUSTAT accounting data, and Bloomberg institutional, insider, CEO, and analyst information. Summary statistics report average institutional ownership of 80.77%, insider ownership of 2.57%, average Newsweek green score of 48.94, and average Bloomberg environmental score of 13.25.
  • Analysis uses panel regressions of institutional holdings on green/brown dummies, excess-return regressions from factor models around ranking releases, a placebo test using private Bloomberg scores, and a difference-in-differences test around the 2010 BP Deepwater Horizon oil spill, with robustness tests using lagged institutional holdings.

Limitations

  • The paper does not include a dedicated limitations section. It acknowledges potential endogeneity from omitted variables and reverse causality and uses the BP oil spill as a quasi-natural experiment to mitigate these concerns.
  • Stated data constraints include Newsweek not ranking S&P 500 firms in 2013, combining 2017 and 2018 into one ranking year, and Bloomberg holdings/CEO/analyst data being available only from 2010, with first-quarter 2010 data used as a proxy for end-2009 values.
  • Evident from the design: retail trading is inferred as the residual after institutional and insider holdings rather than directly observed; the public-versus-private information split assumes retail investors rely on public rankings and lack Bloomberg access; and results are specific to S&P 500 firms and the studied periods, with Newsweek methodology changes noted by the authors.

Model-written summary. Check it against the paper before relying on it.

Integrity signals

Registry

Crossref · 10.1002/rfe.70039

Cites

36 of 36 references verified0 citation errors · 0 not checkable

Statistics

Nothing to recompute.

Claims the paper makes

1 of 8 cited sources checked · 0 supported · 0 flagged · accuracy not yet measured

  • Premisecitation

    Institutional investors do not use exit and selection as mechanisms to push for ESG improvements.

    “This is consistent with Dyck et al.'s (2019) finding that institutional investors do not use exit and selection as mechanisms to push for ESG improvements.”
    Quote in the paperSubstantial claim1 of 1 sources checked
    • cites Dyck et al. (2019) source

      The Introduction says selecting good E&S firms or selling bad ones is not a driver of E&S performance change, and Section 4.1 finds no support for exit and selection explaining broad changes. But Section 4.1 also says some investors use screening and exit to influence firms. The claim overstates a finding that these mechanisms are not important overall as a finding that investors do not use them. (LLM, conf=0.88)

      Experimental — accuracy not yet measured
  • Findingown data

    There was a positive market reaction to the announcement of public environmental rankings (Newsweek's S&P 500 green ranking).

    “we observe a positive market reaction to the announcement of public environmental rankings (i.e., Newsweek's S&P 500 green ranking)”
    Quote in the paperSubstantial claim
  • Findingown data

    After the release of Bloomberg scores in the 2017-2023 period, institutional holdings of brown firms declined significantly.

    “By contrast, after the release of Bloomberg scores, institutional holdings of brown firms declined significantly.”
    Quote in the paperSubstantial claim
    • Rests on an assumption: Most retail investors do not have access to Bloomberg data, so the market's response to Bloomberg scores is mostly shaped by institutional investors.
  • Findingown data

    The study reports a generally positive market response from retail investors to firms' green efforts.

    “It also reports a generally positive market response from retail investors to firms' green efforts.”
    Quote in the paperSubstantial claim
  • Findingown data

    This negative relationship loses its significance after firm-level control variables are added.

    “However, this negative relationship loses its significance after firm-level control variables are added.”
    Quote in the paperSubstantial claim
  • May combine two claims. 22
  • Classified as probably not a substantial claim. 2

  • May combine two claims.

    Findingreasoning

    The effect of retail investors responding positively to public rankings disappeared in recent years, as demand from retail investors has been met by institutional options.

    “This effect has disappeared in recent years, as demand from retail investors has been met by institutional options.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    At the end of the ranking year or after the green rankings are publicized, institutional investors hold fewer green and fewer brown firms in all models.

    “However, at the end of the ranking year or after the green rankings are publicized, institutional investors hold fewer green and fewer brown firms in all models.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    One year before private Bloomberg scores are reported, Bloomberg scores are positively related to excess returns, negatively related to the brown dummy, and insignificantly related to the green dummy.

    “It shows that one year before the private scores are reported, Bloomberg scores are positively related to excess returns, negatively related to the brown dummy and insignificantly related to the green dummy.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    Brown firms have negative excess returns in t-2 years, and excess returns in t+2 years are positively related to firms' environmental performance.

    “Brown firms have negative excess returns in t -2 years, and excess returns in t + 2 years are positively related to firms' environmental performance.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Findingown data

    None of the interactive terms with Bloomberg score are significant, indicating a lack of market response from institutions to firms in terms of green performance.

    “None of the interactive terms with Bloomberg score are significant, indicating a lack of market response from institutions to firms in terms of green performance.”
    Quote in the paperSubstantial claim
    • Rests on an assumption: Most retail investors do not have access to Bloomberg data, so the market's response to Bloomberg scores is mostly shaped by institutional investors.

  • May combine two claims.

    Findingown data

    In Model 1, institutional holdings are negatively related to the Bloomberg green dummy at the beginning of the ranking year and negatively related to the brown dummy at the end of the ranking year.

    “Table 3 shows that in Model 1, institutional holdings are negatively related to the Bloomberg green dummy at the beginning of the ranking year and negatively related to the brown dummy at the end of the ranking year.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Findingown data

    No significant relation exists between green rankings/dummy and excess returns before the public ranking release date; green firms are not rewarded before the ranking is released.

    “However, no significant relation exists between green rankings/dummy and excess returns before the public ranking release date-in other words, green firms are not rewarded before the ranking is released.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    The public green ranking is significantly and positively related to excess returns, and this relation persists in the year following the ranking date.

    “The public green ranking is significantly and positively related to excess returns, and this relation persists in the year following the ranking date.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    The study finds lowered institutional holdings for firms with high public green rankings but no changes in institutional holdings for firms with high private environmental scores.

    “Employing public green rankings and scores, this study finds lowered institutional holdings for firms with high public green rankings but no changes in institutional holdings for firms with high private environmental scores.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingnone given

    In the post-2016 period, both retail and institutional investors exhibit aversion toward environmentally poor (brown) firms.

    “In the post-2016 period, both retail and institutional investors exhibit aversion toward environmentally poor (”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    The coefficient for the triple interaction term Treated Firm × Post Event × Rank is significant and positive, indicating an enhanced marginal green effect after the event for the energy and extractive industries relative to other industries.

    “However, the coefficient term for the triple interactive term, Treated Firm × Post Event × Rank i , is significant and positive, indicating an enhanced marginal green effect after the event for the energy and extractive industries relative to other industries.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    Retail investors respond positively to increases in public rankings by paying a green premium and increasing their holdings during the period when environmental, social and governance (ESG) investment was becoming increasingly popular.

    “we show that retail investors respond positively to increases in public rankings by paying a green premium and increasing their holdings during the period when environmental, social and governance (ESG) investment was becoming increasingly popular.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    With more firm-level variables controlled in Model 2, institutional investors hold fewer shares of brown firms but not of green firms.

    “When more firm-level variables are controlled in Model 2, institutional investors hold fewer shares of brown firms but not of green firms.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Interpretationreasoning

    Institutional investors do not pay a green premium even though they do punish less sustainable firms for potential environmental risks.

    “This provides initial evidence showing that institutional investors do not pay a green premium even though they do punish less sustainable firms for potential environmental risks.”
    Quote in the paperSubstantial claim
    • Rests on an assumption: Institutional investors have information on firms' green performance before it is publicized.

  • Classified as probably not a substantial claim.

    Study design and conductreasoning

    Newsweek green rankings are more consistent than green scores over time.

    “Since Newsweek has been improving its methodology over time, we focus on green rankings as they are more consistent than green scores over time.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Premisecitation

    Institutional investors operate under fiduciary duties, benchmark tracking, and career and fee considerations.

    “Institutional investors operate under fiduciary duties, benchmark tracking, and career and fee considerations”
    Quote in the paperSubstantial claim0 of 1 sources checked
    • cites Evans & Fahlenbrach, 2012 source

  • May combine two claims.

    Interpretationreasoning

    Institutional investors reduce their holdings (retail investors increase their holdings) of green firms over the time surrounding the green ranking release date.

    “Hence, institutional investors reduce their holdings (retail investors increase their holdings) of green firms over the time surrounding the green ranking release date.”
    Quote in the paperSubstantial claim
    • Rests on an assumption: Any movement in volume or price not attributable to institutional investors is done by retail investors.

  • May combine two claims.

    Premisecitation

    Retail investors face fewer formal constraints and are more likely to derive expressive or identity-based utility from investing in environmentally responsible firms if sustainability is important to them.

    “Retail investors, by contrast, face fewer formal constraints and are more likely to derive expressive or identity-based utility from investing in environmentally responsible firms if sustainability is important to them.”
    Quote in the paperSubstantial claim0 of 2 sources checked
    • cites Barber & Odean, 2013 source
    • cites Chung et al., 2014 source

  • May combine two claims.

    Premisecitation

    Individual investors respond strongly to salient public information, moral narratives, and social norms, and are willing to trade off financial returns to express ethical or value-based preferences.

    “Behavioral finance research shows that individual investors respond strongly to salient public information, moral narratives, and social norms, and are willing to trade off financial returns to express ethical or value-based preferences”
    Quote in the paperSubstantial claim0 of 2 sources checked
    • cites Barber & Odean, 2013 source
    • cites Chung et al., 2014 source

  • May combine two claims.

    Interpretationcitation

    Market responses to public green rankings primarily reflect retail investor behavior, whereas responses to private Bloomberg ESG scores, if present, must be driven by institutional investors.

    “We therefore argue that market responses to public green rankings primarily reflect retail investor behavior, whereas responses to private Bloomberg ESG scores, if present, must be driven by institutional investors.”
    Quote in the paperSubstantial claim
    • Rests on an assumption: Institutional investors typically have access to proprietary ESG data, whereas retail investors rarely subscribe to such services and instead rely on publicly available rankings.

  • May combine two claims.

    Premisecitation

    Institutional investors are informed traders who rely heavily on private or costly information, while retail investors primarily trade on publicly available information.

    “Prior research documents that institutional investors are informed traders who rely heavily on private or costly information, while retail investors primarily trade on publicly available information”
    Quote in the paperSubstantial claim0 of 2 sources checked
    • cites Rodriguez & Lawrence, 2019 source
    • cites Yan & Zhang, 2009

      Couldn’t be matched to a paper in Crossref, so it can’t be checked.

  • May combine two claims.

    Interpretationown data

    The pattern of results validates the hypothesis that retail investors primarily respond to public rankings, whereas institutional investors are more attentive to private information.

    “This pattern validates our hypothesis that retail investors primarily respond to public rankings, whereas institutional investors are more attentive to private information.”
    Quote in the paperSubstantial claim
    • Rests on an assumption: Most retail investors do not have access to Bloomberg data, so the market's response to Bloomberg scores is mostly shaped by institutional investors.

  • May combine two claims.

    Interpretationown data

    ESG demand initially arises from retail investors and is subsequently transmitted into institutional investment offerings.

    “we show that ESG demand initially arises from retail investors and is subsequently transmitted into institutional investment offerings.”
    Quote in the paperSubstantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Study design and conductnone given

    The two industry classifications (GICS and SIC) yield almost identical sample firms.

    “Both industry classifications yield almost identical sample firms.”
    Quote in the paperNot a substantial claim
24 of 24

  • The paper relies on this without support.

    The BP Deepwater Horizon oil spill of April 2010 represents an exogenous shock to the perceived value of being green and exposure to environmental risk, especially for the energy and extractive industries.

    “This event represents an exogenous shock to the perceived value of being green and exposure to environmental risk, especially for the energy and extractive industries.”

  • The paper relies on this without support.

    Public green rankings are widely disseminated and amplified by the media, providing salient signals to retail investors.

    “Public green rankings, which are widely disseminated and amplified by the media, provide precisely such salient signals”

  • The paper relies on this without support.

    Institutional investors typically have access to proprietary ESG data, whereas retail investors rarely subscribe to such services and instead rely on publicly available rankings.

    “In the context of corporate environmental performance, institutional investors typically have access to proprietary ESG data, such as Bloomberg environmental scores, whereas retail investors rarely subscribe to such services and instead rely on publicly available rankings, including Newsweek's green rankings.”

  • The paper relies on this without support.

    During 2009-2016, institutional investors faced few incentives to incorporate environmental objectives into investment decisions.

    “During this early stage, institutional investors faced few incentives to incorporate environmental objectives into investment decisions.”

  • The paper relies on this without support.

    Any movement in volume or price not attributable to institutional investors is done by retail investors.

    “Because all trades are made by either institutional investors, retail investors, or insiders, we infer that any movement in volume or price that is not attributable to institutional investors is done by retail investors.”

  • The paper relies on this without support.

    Most retail investors do not have access to Bloomberg data, so the market's response to Bloomberg scores is mostly shaped by institutional investors.

    “Since most retail investors do not have access to Bloomberg data, the market's response to Bloomberg scores should mostly be shaped by institutional investors.”

  • The paper relies on this without support.

    Institutional investors have information on firms' green performance before it is publicized.

    “Institutional investors have information on firms' green performance before it is publicized”

  • The paper relies on this without support.

    The earlier sections may suffer from endogeneity issues such as omitted variables and reverse causality.

    “The above sections may suffer from endogeneity issues such as omitted variables and reverse causality.”
8 of 8

Self-check

Percentages, sums and reported differences re-computed from the paper’s own numbers.

Each contradiction between two passages listed here was confirmed by an independent check.

  • Table 5 significance marker conflicts with its reported p-value

    Minor

    Table 5 marks the intercept with one star despite reporting a p-value of 0.01. Its note says one star denotes 10% significance, while two or three stars denote the stricter levels met by that p-value.

  • Green-ranking median differs from Table 1

    Minor

    The prose gives the median green ranking as 500, but Table 1 reports 251.00.

  • Bloomberg ESG score bounds conflict with the reported mean

    Minor

    Under Table 1's column headings, the Bloomberg ESG score has a maximum of 1.32 and a minimum of 72.27. Those bounds are reversed, and the reported mean of 27.22 cannot fall between them.

3 of 3

Cites

Flagged first, then by citations

Related

Authors
You, L., & Payne, J.
Affiliations
Texas State University (US)
Corresponding author
You, Leyuan
ORCID
Venue
Review of Financial Economics
Publisher
Wiley
Published
2026-02-12
Volume
44
Issue
2
ISSN
  • 1058-3300 (ISSN-L)
  • 1873-5924
DOI
10.1002/rfe.70039
OpenAlex
W7128708096
Semantic Scholar
33cc05dea7408c49cf90ea65df524e39ddcf88a6
Cited by
0
References
31
FWCI
0.00
Type
journal article
Language
en
Open access
Licence
Locations
Review of Financial Economics (publishedVersion)
Topics
  • Social Sciences › Economics, Econometrics and Finance › Finance › Sustainable Finance and Green Bonds
  • Social Sciences › Business, Management and Accounting › Strategy and Management › Corporate Social Responsibility Reporting
  • Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
Keywords
ESG investing, corporate environmental responsibility, retail investors, institutional investors, green premium, environmental disclosure, investor demand, S&P 500 firms, institutional ownership

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