The impact of ESG preferences on stock borrowing volumes and fees*

• Green investors derive non-monetary utility (the “green premium”) from holding green stocks, leading them to overweight these stocks despite lower expected returns. • Traditional investors underweight green stocks, viewing them as overpriced based solely on risk-return considerations. • Empirical evidence suggests green and brown stocks have higher borrowing volumes than neutral ones, partially supporting the hypothesis of greater demand. • Borrowing fees are significantly higher only for green stocks, supporting the idea that green investors demand compensation for the lost green premium when lending. • The borrowing fee premium is economically small (∼1 basis point), but the study still highlights how ESG preferences can affect stock lending dynamics and asset pricing. Capital market models propose a green premium in expected stock returns due to differing ESG preferences. Green investors favor green stocks, causing a scarcity raising borrowing volumes and fees. Using U.S. stock lending data, we find both green and brown stocks show higher borrowing volumes than neutral ones. However, only green stocks exhibit slightly higher fees, indicating limited supply driven by ESG preferences. Brown stocks show no such constraint. Though statistically significant, the fee premium for green stocks is economically minor – below one basis point – possibly due to weak ESG preferences or green investors neglecting the premium lost when lending.