This paper examines the benefits and costs of greenwashing in mutual funds. We identify greenwashing funds by analyzing their ESG-related disclosures using large language models (LLMs) alongside green investments. Greenwashing funds charge higher fees while attracting greater flows, with investors exhibiting tolerance for poor performance. However, they face higher regulatory and reputational costs. ESG-related comment letters issued by the SEC trigger outflows from greenwashing funds, spilling over to non-greenwashing funds within the same family. SEC's scrutiny reduces future green disclosures, but its effectiveness weakens when SEC faces human capital constraints. Finally, institutional and retail investors respond differently to greenwashing behavior.

This paper analyzes the impact of disclosures of sustainable investment targets under the EU Sustainable Finance Disclosure Regulation (SFDR) on mutual fund flows. Using a staggered difference-in-differences setup and focusing on retail-oriented index funds, we find that sustainable investment targets have a temporarily positive impact on fund flows in comparison to funds without sustainable investment targets. Furthermore, we find a negative linear relationship between sustainable investment targets and fund flows. While lower targets attract higher fund inflows, higher targets result in significantly lower or even no inflows. Our results suggest that up to a target level of 20% in sustainable investments, index funds can attract more inflows. This suggests a trade-off between sustainability commitments and performance considerations.