The Disclosure Fog: Institutional Investors and Corporate Greenwashing

Fumin Zhu, Haoyuan Fan and Zunxin Zheng

International Journal of Finance & Economics, 2025, vol. 30, issue 4, 3856-3874

Abstract: Corporate environmental, social, and governance (ESG) disclosure is often a superficial signal rather than something of substance and is an easily negligible form of greenwashing. Here, we explore the relationship between corporate disclosure greenwashing and institutional investors using data from Chinese listed heavily polluting firms from 2012 to 2021. We hypothesise and discover that while institutional investors encourage firms to publish social responsibility reports, they may actually discourage the use of sustainability‐related phrases in these reports. The findings hold even after performing several endogeneity and robustness tests. We also identify three mechanisms through which institutional investors influence corporate greenwashing: corporate governance, information transparency, and corporate operations. Additionally, pressure‐sensitive institutional investors are more likely to facilitate corporate greenwashing than pressure‐insensitive and pressure‐uncertain investors. However, after the Guidance on Building Green Financial System's implementation in 2016, the positive relationship between disclosure greenwashing and institutional investors has rapidly declined. The promotional effect of institutional investor‐induced greenwashing is also lower in state‐owned enterprises. Overall, our findings not only enrich the literature on institutional investors and corporate information disclosure but also have implications for improving the green financial system.

Date: 2025
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