Green window dressing

This paper establishes that mutual funds strategically time the trades of ESG stocks around disclosure to inflate their sustainability ratings. This claim is supported by four analyses. First, we show that funds' ESG betas increase shortly before disclosure and decrease shortly afterwards. Second, we establish that funds outperform the portfolios they disclose. Third, we document an increase in ESG buys (sells) before (after) disclosure based on imputed fund trades. Fourth, we provide evidence that ESG stock prices temporarily rise before disclosure and decline afterwards. Overall, we document that green window dressing positively impacts fund sustainability ratings, performance, and flows.