Green Window Dressing

We uncover evidence of widespread sustainability ratings manipulation by mutual funds. Our analysis finds that ESG fund portfolios exhibit 31% higher ESG exposure immediately before mandatory portfolio disclosure than immediately afterwards. As a result, disclosed portfolios receive substantially higher ratings than actual portfolios would. We document that ESG manipulators earn higher risk-adjusted returns and attract more investor flows. At the asset level, we find that high-ESG (low-ESG) stocks rise (fall) in the days before fund portfolio disclosure and revert afterwards. We discuss whether ESG manipulation is optimal for investors and document similar behavior by non-ESG funds, albeit more limited