When institutional investors began pouring money into ESG stocks more than a decade ago, returns climbed—and giant fund managers like BlackRock piled on.
Institutional investors and asset managers moved some $3 trillion into funds weighted toward environmental, social, and governance (ESG) stocks from 2012 to 2023. Funds tilted toward ESG stocks outperformed funds that underweight them by 2.2% annually, on average. But most of that gain—1.9 percentage points—came from the inflows, not from performance, says research by Harvard Business School Assistant Professor Philippe van der Beck.
“The reason they’ve done well is not because these are great companies that had amazing cash flows,” he says. “There was a large push from the ESG industry toward them that made their prices increase.”
ESG flows ramped up as cash looked for an altruistic-but-profitable place to land in the wake of the global financial crisis, amid an improving US economy and increasingly dire climate forecasts, van der Beck says. While investors found satisfaction in supporting sustainable or social justice-focused businesses, the gains were mostly self-propelled.
“There was a lot of money, a lot of preference for doing good in the world,” he says. “Asset managers supplied a way to do that with ESG funds. Investors ate up these ESG funds like crazy—advisers, mutual funds, banks, insurance companies, pension funds—they all bought ESG portfolios.”
The findings—featured in the forthcoming article "Flow-Driven ESG Returns" in the Journal of Finance—challenge a core mantra: that investors can do well by doing good. Despite limited upside, van der Beck says that investors still provided an important cash infusion to ESG companies, lowering their cost of capital and contributing to their stability.
When fundamentals don’t match enthusiasm
To understand demand for ESG-heavy investments, van der Beck examined investment holdings in Securities and Exchange Commission disclosures required for firms with more than $100 million in assets. Based on his analysis, managers collectively moved about $3 trillion into ESG investments more broadly, an order of magnitude larger than the $350 billion that flowed to explicitly ESG-branded mutual funds.
Corporate financial statements enabled van der Beck to link flow data to operating profit and cash flow, comparing stock gains to fundamental growth at ESG companies. Simulating a version of history without the $3 trillion influx, he was able to isolate the component of total realized returns that purely came from fundamentals.
What he found was decisive: For every $1 flowing into ESG funds, some 80 cents was driven by price pressure, not by the prospect of future results based on financial statements. That all but eliminates a perceived “alpha” or the ability to outperform non-ESG investments, the research says.
Rising prices still helped ESG companies
Prices jumped significantly in order to accommodate the $3 trillion institutional ESG demand shift. Under these "inelastic conditions"—in which surging flows drive returns instead of fundamentals—sellers of ESG stocks required more pay to bet against them.
To test the results, van der Beck looked at post-2018 returns, with and without increased demand. He found ESG-tilted funds returned 4%. But without that cash, returns would have been about 0.5%.
The flows didn’t predict future profitability, nor did they support the notion that these ESG firms were managed better than firms that didn’t prioritize ESG principles.
One benefit, though, may have helped fundamentals: the influx of capital. Higher stock prices effectively lower the cost of capital—how much companies pay for loans—for ESG-leaning firms, potentially making the companies healthier.
A new way to think about ESG investing?
While the prospects for ESG-based gains might seem grim, van der Beck says that investors shouldn’t consider impact investing a failed endeavor. It just might require investors to reframe their motives and expectations, knowing that ESG portfolios are:
Unlikely to deliver outsized returns in the long term
As van der Beck’s data shows, strong returns in recent years came from surging demand that drove prices up, not superior performance.
“If you are in ESG because you think it has high expected returns, then I would be very cautious, because the only way expected returns are continuing to be high is if people plow more money into ESG funds,” he says.
Strongly influenced by institutional interest
Global ESG funds experienced $84 billion in outflows in 2025, according to Morningstar. Though ESG funds have gained from market appreciation, their popularity has waned among institutions amid shifting politics and market conditions.
“There's a big pullback out of ESG in America that’s perhaps politically stimulated. In Europe the pullback is not as strong,”,” van der Beck says. “But generally, ESG investing today is a bit of a luxury good in that sense, and you will see some fluctuations in those preferences.”
Still a meaningful way to achieve ESG impact
If the goal is to help more sustainable or social-justice-minded companies succeed, ESG funds provide these businesses with access to cheaper capital.
“If you are in ESG investing not for the higher returns, but for doing good, that's great news,” he says. “You are pushing up the prices of these companies and giving them cheaper financing. So, you're doing exactly the right thing.”
Illustration created with asset from Unsplash.
