Institutional investors’ behind-the-scene monitoring and ESG disclosure

Given the non-financial nature of ESG information and a lack of unified ESG disclosure standards, firms’ ESG disclosure is largely left to managerial discretion. With burgeoning demand for ESG information, institutional investors have motivations to monitor managerial decisions on ESG disclosure. In this paper, I exploit the unique institutional setting in Chinese stock market and compile a dataset of institutional investors’ corporate site visits, to investigate the effectiveness of institutional investors’ behind-the-scene monitoring through corporate site visits on promoting ESG disclosure. Using staggered difference-in-differences estimations, I document that firm ESG disclosure improves after institutional investors conduct corporate visits and discuss ESG-related issues with management, i.e., ESG-related visits. The effect is not observed for the corporate visits without discussions of ESG issues. Furthermore, I document that the positive link between ESG-related visits and firm ESG disclosure strengthens with visitors’ demands for ESG information and weakens with firms’ proprietary costs. Evidence from investors’ trading behaviors suggests that the monitoring effects of these ESG-related visits are potentially exerted through threats of exit. Moreover, I document that ESG disclosure is negatively associated with divergence in ESG ratings, which could benefit the broad market participants. Collectively, the paper highlights the crucial role of institutional investors in eliciting firm ESG disclosure and pushing the ESG agenda.