Talk or Walk the Talk? The Real Impact of ESG Investing
48 Pages Posted: 8 Nov 2023 Last revised: 9 Nov 2023
Date Written: May 19, 2023
Abstract
I propose a model to study how environmental, social, and governance (ESG) investors influence firms' ESG-related investments and disclosures. Paradoxically, when the firm manager can easily manipulate ESG disclosures, stronger investor ESG preference can decrease green investment: though investors attach a higher value to green outcomes, more greenwashing is induced, making ESG disclosures less reliable. Investors therefore give less reward to firms that claim to be green. Moreover, firms with poor business performance are particularly likely to greenwash and reap benefits from investors. My analysis raises concerns that the rise of ESG investing may have unintended consequences, especially when ESG-disclosure regulations are weak.
Keywords: Greenwashing, ESG, real effects, socially responsible investing, ESG reporting, externality
JEL Classification: G11, G23, G32, M14
Suggested Citation: Suggested Citation