Institutional investors and ESG performance: Evidence from China

Abstract

ESG (environmental, social, and governance) has received the most attention from investors and businesses. As important market participants, institutional holdings affect corporate financial performance and play an important role in promoting ESG performance. In this paper, we investigate the effect of institutional investor ownership on corporate ESG performance using a sample of A-share listed companies in China from 2010 to 2022. Our findings show that institutional investor ownership will promote corporate ESG performance. Compared with non-independent and trading institutional investors, independent and stable institutional ownership have a significant positive correlation with corporate ESG performance. We use a quasi-natural experiment to identify the causal relationship. The results show that the increase in institutional ownership caused by the reconstitutions of the CSI 300 Index and the CSI 500 Index will improve corporate ESG performance. We also discuss possible mechanisms from three dimensions: corporate environmental performance, social responsibility performance, and corporate governance performance. Heterogeneity analysis shows that the positive relation is more pronounced in state-owned enterprises, large-scale enterprises, high-competitiveness enterprises, and heavily polluting enterprises. In addition, further analysis reveals that institutional investor ownership can effectively restrain firms’ “greenwashing” behavior and improve their ESG performance. Furthermore, the increased ESG performance reduces operational risks and increases the firm value. Our study offers a comprehensive perspective that bridges the gap between investment behavior and corporate sustainability.