Bridging the ESG Credibility Gap: The Role of Institutional Investors in Mitigating ESG Decoupling

Abstract

Because of their capacity for sustained and informed monitoring, institutional investors are uniquely positioned to enhance corporate transparency and mitigate ESG decoupling, the gap between corporate sustainability rhetoric and reality. This study examines whether and under what circumstances institutional ownership contributes to aligning ESG disclosure with actual sustainability performance. Analysing an international sample of 3465 listed companies (13,488 firm-year observations) from 2009 to 2023, we find that institutional investors play a crucial role in reducing ESG decoupling. However, this effect depends on their investment horizon: long-term institutional investors mitigate ESG decoupling, whereas short-term institutional investors exacerbate it. These findings contribute to the corporate governance and sustainability literature by showing that institutional investors are not a homogeneous group and that their monitoring effectiveness varies depending on their investment horizon. From a practical perspective, our results highlight the need for regulatory initiatives that incentivise long-term institutional engagement and more stringent ESG reporting requirements to curb opportunistic disclosure practices.