Disclosing green, acting gray: The effects of institutional investors on voluntary green disclosures and environmental performance

Abstract

We investigate whether a large presence of institutional investors motivates firms to voluntarily disclose their green policies and, if so, whether it also leads to better environmental performance. Our study focuses on the Chinese context, where regulatory policies on such disclosures are standardized. To address concerns about reverse causality and omitted variables, we employ a regression discontinuity design around CSI 300/500 stock index reconstitutions. Following these reconstitutions, firms at the top of the CSI 500 index experience an increased presence of institutional investors. These firms subsequently increase their voluntary green policy disclosures, which further leads to higher environmental ratings. However, this increase does not result in higher environmental expenses or improved environmental performance. Additional analysis suggests firms' reactions may be driven by concerns that investors may exit. Overall, our results show that institutional investors may have a limited role in motivating firms to improve their actual environmental performance.

Keywords: voluntary green disclosures, environmental ratings and performance, institutional investors

JEL Classification: G23, G32, Q56