Purpose This study aims to explore whether investors’ inattention is associated with firms’ environmental, social and governance (ESG) decoupling, which is defined as the misalignment between the implementation and incorporation of ESG policies. Design/methodology/approach Focusing on a sample of the components of ESG ratings for China Securities Index (CSI) 300 companies between 2017 and 2019, the authors test the relationship between firms’ ESG decoupling level and mutual fund investors’ distraction by applying exogenous shocks to their portfolios. Findings The results show that firms with distracted mutual fund investors engage in more external than internal ESG actions, leading to a high ESG decoupling level. Mutual fund investors use “threat of exit” rather than “voice” as a governance mechanism to influence corporate ESG decoupling. While external ESG actions mitigate stock price crash risk, internal ESG actions increase firm value; firms with a high ESG decoupling level suffer lower valuations. Practical implications This study has implications for increasing the congruence between firms’ external and internal ESG actions, thereby improving firms’ ESG performance and long-term economic outcomes. Social implications This paper helps policy-makers and regulators to reassess how ESG policies can be implemented to be consistent with organizations’ core business activities. Originality/value Contributing to prior studies of greenwashing and corporate social responsibility decoupling, this paper extends decoupling literature by revisiting ESG impacts in an integrated framework and explores the antecedents of corporate ESG decoupling from the perspective of institutional investor monitoring.
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