Institutional investors, as crucial participants in the capital market, we examine the impact of corporate environmental litigation risks on their investment behavior, under the background of the “Two-Carbon target”. We find that institutional investors significantly reduce their holdings in corporate with high environmental litigation risks, after the establishment of intermediate environmental court. Firms can mitigate environmental litigation risks by implementing voluntary environmental regulations. Further, improvements in environmental justice affect institutional investors’ investment behavior by influencing the status of environmental judicial cases in the region and enhancing environmental administrative supervision. As for investor heterogeneity, firms with higher levels of social and environmental responsibility are more in line with green institutional investors, who care environmental protection. Private and small enterprises can enhance their comparative competitive advantage in green investment development by shouldering social and environmental responsibilities actively.