ESG Mania and the Influx of Institutional Capital

We investigate the motives and consequences of the rapid influx of institutional capital into the ESG stock market in recent decades. We find that institutions crowd into ESG-rated stocks irrespective of stock or institution size, firm’s ESG rating, institution’s information advantage, or market conditions; small and ill-performing institutions exhibit stronger intensity to crowd into the market. However, the influx of institutional capital neither enhances firms’ ESG engagements nor reduces firms’ costs of capital. Herding institutions do not outperform their peers but attract more temporary fund flows. Taken together, our findings suggest that the vast majority of institutions are not sincerely impact-chasing but are more likely impact-washing. A determinant analysis suggests that reputational concern and attracting fund flow are the essential motives.