ESG washing: when cheap talk is not cheap!

Using textual analysis, we introduce an easily replicable ESG washing measure. We then document a robust negative impact of ESG washing on corporate financial performance (measured using Tobin's Q, operating performance, or their future values). This finding withstands multiple robustness checks, including a 2SLS-IV approach, mitigating concerns about potential KLD data misestimation or alternative CSR/ESG ratings. In a supplementary test, we show that the COVID-19 pandemic incentivized firms to engage in increased overselling of their ESG performance. Taken together, our new evidence suggests that 'cheap talk is not cheap' and the misalignment between ‘ESG talk’ and ‘ESG walk’ not only fails to serve shareholders' best interests but may also undermine a firm's social license to operate.