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Investors have long been told that ESG investments outperform financially. I study the implications of this narrative and its interaction with mandatory ESG fund disclosure. Using novel data on private impact funds and ESG fund marketing, I find that funds claiming a positive link between ESG and financial returns dominate, absent widespread mandatory disclosure. These funds generally meet their return targets, but underdeliver on real impact. Mandatory ESG fund disclosure and related enforcement shift the prevailing ESG narrative. Asset managers are more likely to adopt an impact-focused narrative, make underlying portfolio changes that reflect this shift, and, in doing so, attract more capital. A field experiment in collaboration with the largest German investor association reveals the underlying mechanism. Without mandatory disclosure labels, investors adjust their return expectations, but not their impact expectations to the ESG narrative conveyed because they do not trust funds’ impact claims. Hence, narratives of ESG paying off crowd out impact-focused ones. Mandatory disclosure labels that classify funds depending on ESG focus achieve separation between funds based on the impact investors expect, thereby restoring some demand for impact-focused strategies.

The global adoption of IFRS 9 requires banks to recognize loan loss provisions based on forward-looking credit loss estimates. While these rules increase the timeliness of loss recognition and, thus, the cost of high-risk lending, they also expand the scope for managerial discretion in loss estimation. Using supervisory loan-level data on German banks' internal rating models, we examine how banks respond to these countervailing incentives. Relative to unaffected banks, IFRS 9 adopters update their internal credit risk estimates more frequently but assign more favorable internal ratings to otherwise identical borrowers. A lower precision of these ratings accompanies this pattern, consistent with the strategic use of increased reporting discretion. The implications for bank lending are twofold. First, to counter the increased cost of high-risk lending, banks reduce credit to borrowers most likely to experience internal rating downgrades that would trigger additional provisions in future periods. These effects cluster around seemingly arbitrary provisioning thresholds but also extend broadly across the whole non-investment-grade region, indicating a general shift toward lower credit risk in banks' loan portfolios. Second, the increased bias in loss estimates is associated with higher rollover rates for precisely those loans where expected credit losses are underreported, suggesting that expanded reporting discretion distorts lending in a way that optimizes model input rather than portfolio risk.