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This paper assesses whether qualified foreign institutional investors (QFIIs) and domestic institutional investors in China drive the environmental, social, and governance (ESG) performance of firms. We first show that QFII ownership is positively associated with future ESG performance but that domestic institutional ownership is not. We then examine the effect of the increase in QFII investment funds on the decision of domestic institutional investors to drive ESG. We find that with the increase in QFII investment funds, domestic institutional investors start to promote firms to improve future ESG performance, especially domestic institutional investors who have held shares of one same firm as QFIIs at the same time. In particular, funds and security funds are affected by QFIIs, and the effect of institutional ownership is stronger in the ESG categories of corporate governance, workforce diversity and product quality. Overall, our results suggest that QFIIs motivate Chinese institutional investors to drive ESG.

Does increasing the QFII quota promote Chinese institutional investors to drive ESG?