ESG Mania and Institutional Trading

Speaker: Prof. Riza Demirer, Dept. Economics & Finance, School of Business, Southern Illinois University, Edwardsville, IL

Abstract: Recent years have seen that institutional investors simultaneously crowd in (buy) the ESG stock market. The aim of this study is to investigate the underlying motivations and their economic consequences. The empirical results are consistent with the hypothesis of ESG washing rather than that of impact investing, that is ESG-washing investors dominate the market. Specifically, institutional herding exists widely in the ESG market; small, dedicated, and ill-performed institutions exhibit strong intensity to herd into the ESG stock market; herding institutions experienced outflows recently and attract more flows when they herd. Herding institutions neither outperform nor that their trading significantly impacts stock prices (except in bad times). Our study highlights the mixed and complicated motivations of ESG investors from an institutional perspective, which helps reconcile the opposite findings of sincere ESG investing and washing behavior documented in the growing literature on sustainable investments.