This dissertation consists of two chapters exploring how the rise of sustainable investing fundamentally changes the interaction between financial markets and the real economy. In the first chapter, I propose a model to examine how investors with ESG preferences jointly influence firms' real green investments and greenwashing. Paradoxically, stronger investor ESG preferences may reduce real green investments due to increased greenwashing, which undermines the reliability of ESG information. When this information distortion is severe, firms are disincentivized to make real green investments, as the market-perceived ESG gains are obscured by misinformation, while the financial costs of green investments are still reflected in stock prices. This paradox is most likely to occur when the cost of manipulating ESG information is low, the correlation between ESG and financial fundamentals is weak, and financial information quality is high. Additionally, brown firms with poorer financial performance tend to greenwash more. These findings raise concerns that ESG investing could backfire without effective disclosure regulations. I analyze two practical measures to enhance real impact: diversifying green technology options and linking executive pay to ESG outcomes. The second chapter is coauthored with Itay Goldstein. A common critique of ESG divestment is that traditional investors can buy divested stocks, thus neutralizing the intended impact. We propose a novel mechanism showing how ESG divestment can incentivize firms to adopt ESG practices, even when the fraction of ESG capital is limited. The key condition for impact is that ESG investors maintain a balanced emphasis on both ESG and financial fundamentals, coupled with private information on both. When ESG investors sell stocks, their trading motives remain uncertain to traditional investors. Traditional investors interpret selling as a potential bad signal about financial value, driving down stock prices. Therefore, firms may adopt ESG practices to avoid this negative price impact. We also show that this disciplining effect on firms' ESG practices is non-monotonic in investor ESG preferences. Particularly, when investor ESG preferences are too strong, the uncertainty about their trading motives vanishes, reducing the impact of divestment. Our findings provide novel empirical implications and offer important guidance for impact investors.