Firms’ green claims have become ubiquitous in recent years. Products are “recycled” or “responsibly sourced,” financial instruments are “green” or “ESG,” firms promise to become “carbon neutral” or “net-zero,” and so on. But can the recipients of such claims assess whether they are true? Rarely, we posit. Environmental qualities tend to have credence attributes. So long as consumers and investors are willing to pay a premium for goods that appear to align with their environmental awareness, firms have opportunities and incentives to engage in greenwashing: marketing products or entire firms on the basis of misleading or false sustainability claims.

One response to this information asymmetry between producers and consumers and investors is third-party certification by “green gatekeepers,” information intermediaries that set green standards or verify the related claims. In a new paper, we analyze green gatekeepers, drawing insights from behavioral studies and the law and economics literature on traditional gatekeepers such as underwriters and audit firms.

Green gatekeepers may play a crucial role for three reasons. First, their certifications may prevent market failures in interactions between informed sellers and buyers who cannot otherwise assess product quality. Without accurate green gatekeepers’ certifications, consumers and investors – unable to tell fact from fiction – may inadvertently pay a premium for greenwashed products, dulling firms’ incentives to adopt truly green strategies.

Second, by enabling consumers to identify truly sustainable products, green gatekeepers may support demand-side mitigation strategies, blunting the impact of climate change. Demand-side mitigation strategies, including managing and altering lifestyles and patterns of consumption, can play a fundamental role in reducing greenhouse gas emissions across all sectors of the economy, combating climate change. But those strategies can only realize their potential if consumers are able to identify truly sustainable options, a condition that green certifications may help satisfy.

Third, the green transition requires enormous financial resources that the public sector is unlikely to provide. Green gatekeepers could help environmentally conscious investors direct their financial resources towards projects that contribute to mitigating climate change.

Our paper tackles two crucial questions: whether green gatekeepers have the right incentives to issue accurate certifications and, if not, how policymakers should respond.

The starting point for our analysis is that gatekeeper certifications have value only to the extent that the relevant gatekeeper possesses a reputation for being trustworthy. One might assume, therefore, that market mechanisms would induce gatekeepers to set appropriate standards, diligently verify compliance, and, as an outcome, issue accurate certifications. Yet, those mechanisms may be insufficient to provide gatekeepers with the incentives to do so.

Certification users often lack the ability or the incentives to identify and punish false certifications. First, green gatekeepers’ certifications help users feel that they are behaving morally even if they are acting selfishly, which in this setting increases users’ incentives to take certifications at face value, making reputational harm less likely. Second, users of green gatekeepers’ certifications often face limited or no private costs when they accept inaccurate certifications, weakening their incentives relative to those of their counterparts in traditional gatekeeper markets to investigate the gatekeeper’s conduct. Third, even assuming that users of green gatekeepers’ services have sufficient incentives to investigate gatekeepers’ conduct, in many instances they are unlikely to be able to do so because the science underlying the certification might simply be too complex. Finally, we show that private players that may help expose inaccurate certifications in traditional markets, such as traders, nongovernmental organizations, and the media, may be less effective in green gatekeeper settings. The result is that reputational constraints are less likely to discipline green gatekeepers than those of traditional gatekeepers.

With these issues in mind, we hand-code data on over 450 green gatekeepers, and we show that many of these gatekeepers are opaque, as in many instances they do not even disclose the standards they follow.

We then provide a framework to address the question of whether green gatekeepers should be regulated and, if so, how. Recognizing that gatekeeper regulation may supplement primary liability as a control strategy, we consider the effectiveness of primary liability for false green claims, namely the liability of firms themselves under consumer protection and securities laws for inaccurate claims made toward their consumers and investors. We argue that primary liability is unlikely to deter greenwashing and that gatekeeper regulation holds greater promise than merely increasing the magnitude or probability of penalties on firms. Given the weaknesses in gatekeepers’ reputational constraints but also the wide variety of green gatekeeper certifications, we recommend that the question of which green gatekeepers should be regulated, and how, be answered also on the basis of a classification of green gatekeepers along two dimensions: (i) the significance of private costs incurred by users who rely on inaccurate certifications; and (ii) the verifiability of green certifications by policymakers and courts.

While the cost-benefit assessment for regulating individual green gatekeepers hinges mainly on the features of each green certification, we argue that, other things equal, classification according to these dimensions justifies the application of a specific policy mix. To illustrate how our framework can be used to improve the incentives of green gatekeepers to issue accurate certifications, we show how it can be applied to key gatekeepers in five distinct areas of certification: firms’ net-zero targets, carbon offsets, responsibly sourced gas, energy efficiency certifications, and animal welfare.

A policy framework like the one we propose is of the utmost importance because a great deal is at stake in the work of green gatekeepers. If firms market inaccurate credentials, consumers and investors – who cannot be relied on to verify green claims – may be misled. Worse, the promise of demand-side climate change mitigation strategies may be squandered. Green gatekeepers are worthy of scrutiny and also, depending on the type of certifications they issue, appropriately tailored regulation.

This post comes to us from professors Luca Enriques at the University of Oxford,  Sandro Romano at Bocconi Law School, and Andrew F. Tuch at Washington University in St. Louis. It is based on their recent paper, “Green Gatekeepers,” available here. A version of this post appeared on the Oxford Business Law Blog.