Institutional trading and ESG controversies

We examine how and why institutional investors trade differently around firms' negative environmental, social, and governance (ESG) news. We find that they reduce net purchases primarily after the ESG incidents. However, those with higher ESG preferences begin reducing their net purchases before the news breaks, likely to safeguard their ESG reputation and mitigate portfolios' ESG risk. Additionally, institutions’ net purchases decline before negative ESG news in firms with high levels of information asymmetry, leading to abnormal returns, indicating that these institutions are informed and trade in advance for financial gains. In contrast, retail investors appear largely insensitive to ESG incidents.