Retail Investors, Not Institutions, Drove the Early Demand for Green Companies

Who first pushed companies to take environmental responsibility seriously in the stock market? A common assumption is that large institutional investors, with their ESG mandates and stewardship teams, led the way. A new paper in the Review of Financial Economics finds the opposite. The early demand came from retail investors, the individuals who buy stocks for their own accounts.

The authors are Leyuan You, Associate Professor of Finance, and Janet Payne, Professor of Finance, both in the Department of Finance and Economics at the McCoy College of Business at Texas State University.

The study

ESG stands for environmental, social, and governance, the three areas that responsible investing tries to score. The paper focuses on the environmental part. It uses green rankings of S&P 500 firms, which rate large companies on their environmental performance.

The design turns on a distinction between two kinds of information. Public rankings are released widely and are easy for any investor to see. Private green scores are the underlying data that professional and institutional investors can access but that do not reach the general public in the same way.

If retail investors are the ones who care, the market should react when public rankings change. If institutions are the ones who care, the market should react when private scores change. The authors compare both, then check the results with a quasi-natural experiment, a setting where an outside event changes information for some firms but not others. They also test the findings against data on institutional holdings.

What the researchers found

When a firm’s public green ranking rose, retail investors responded. They paid a green premium, meaning they bid the price up, and they increased their holdings of the stock. This was during the period when ESG investing was becoming popular.

When a firm’s private green score rose, nothing much happened. There was no significant market reaction, which the authors read as evidence that institutional investors were not weighing environmental protection heavily in their decisions at the time. The quasi-natural experiment and the institutional holdings tests point the same way.

The paper also documents a change over time. The retail effect has disappeared in recent years. The authors’ explanation is that institutional products, such as ESG funds, have grown to meet the demand that retail investors first expressed directly.

What it means for investors and policymakers

For investors, the findings offer a reminder that ESG pricing has a history. The green premium retail investors once paid on ranking upgrades is no longer visible in the data. Anyone modeling returns to environmental performance should not assume the early pattern still holds.

For policymakers, the message is about incentives. Retail investors were the primary drivers of early demand for environmental responsibility. Institutions followed rather than led. If regulators want capital markets to reward environmental performance, the paper suggests the lever is to shape how institutional investors are incentivized, since institutions now channel most of that demand.

For corporate managers, the study shows that public, visible environmental rankings had real market consequences, at least for a period. What gets seen gets priced.

This summary is based on the paper’s abstract. The full article reports the data, methods, and detailed results.

What it means for managers

• Environmental demand started at the bottom. Retail investors responded to public green rankings with a price premium and larger holdings. Institutions did not react to private scores.
• Visibility matters more than the score. The same underlying environmental performance produced a reaction only when it was published where individual investors could see it.
• The window has closed, for now. The retail premium has disappeared in recent years as institutional ESG products absorbed that demand, which shifts the policy question to how institutions are incentivized.

You, L., & Payne, J. (2026). The origins of ESG demand: Evidence from retail and institutional investor responses to environmental rankings. Review of Financial Economics, 44(2). 10.1002/rfe.70039