In a new paper, we investigate the financial implications of greenwashing, focusing on stock market responses to identifiable greenwashing events and accounting for the heterogeneity of global regulatory landscapes.1 Greenwashing is a deceptive advertising and marketing technique that organizations use to falsely convince the public that their products, goals, and policies are environmentally sound. However, while many firms genuinely strive to achieve and report sustainable practices, others use these deceptive tactics to project an eco-friendly image, often without substantive action. Fundamentally, greenwashing breaches stakeholder trust.

To investigate the effects of greenwashing, we analyze almost 10,000 cases where companies made exaggerated or deceptive claims about their environmental practices, as identified using the novel RepRisk database, with further robustness added through several prominent  sources of information.2 Results, as generated using EGARCH3 methodologies selected for their effectiveness when dealing with volatility clustering, indicate that investors impose a financial penalty on firms engaged in these practices, evidenced by an immediate negative abnormal stock return of approximately -0.63 percent. In the short term, companies implicated in greenwashing face heightened volatility and significant negative returns, particularly on the day following public disclosure of their behavior.

Stock market responses, however, are not uniform; they vary considerably by sector and regulatory environment. Notably, industries closely tied to environmental concerns, such as energy and manufacturing, face more substantial investor backlash. These sectors, already under scrutiny due to their significant environmental footprint, appear to bear a higher reputational cost when accused of greenwashing, suggesting a heightened sensitivity among investors and stakeholders.

We also find that the regulatory landscape is critical in shaping investor responses to greenwashing incidents. Companies caught greenwashing in nations with stringent environmental regulations tend to see their stock drop more than do such companies in other nations. Where regulatory frameworks are more rigorous, greenwashing is seen not merely as an ethical breach, but also as a violation of public trust, prompting investors to penalize these companies more heavily. This effect is particularly pronounced in regions where society’s attitudes align with stringent environmental values, reflecting a synergy between public consciousness and regulatory oversight. For instance, the United States and several European nations with established regulatory bodies and heightened environmental awareness see markedly higher negative returns following greenwashing disclosures. This response underscores the financial risks associated with non-compliance.

The Influence of Traditional and Social Media 

The influence of media scrutiny cannot be overstated in the context of greenwashing. Far-reaching media coverage, encompassing global publications and major news outlets, has been shown to amplify investor reactions, leading to prolonged periods of negative returns. For example, companies facing international media attention experience an additional decline in returns within the first week following a greenwashing event, with some lasting effects visible up to a month later. This heightened market sensitivity, particularly when driven by prominent media sources, reinforces the role of transparent information dissemination in holding companies accountable. The negative financial impact for companies exposed by influential media highlights the evolving relationship between transparency and valuation, with media vigilance acting as an effective deterrent against greenwashing. The severity and novelty of greenwashing allegations also shape investors’ responses. High-severity incidents, which include those with substantial environmental repercussions or overtly deceptive tactics, provoke sharper negative reactions.4

Furthermore, when a company is implicated in deceptive environmental claims for the first time, the negative market response is even more pronounced. This finding suggests that firms with a previously clean environmental record face harsher investor rebuke when exposed, while those with a history of greenwashing incidents may see somewhat muted reactions, perhaps because investors trust them less to begin with.

The increasing negative impact of greenwashing on returns could reflect growing awareness and concern among investors about environmental issues. This suggests that “green” factors are becoming more important in investment decisions. Cross-border differences can also be attributed to environmental consciousness or varying society’s attitudes towards the environment. Countries with a high level of environmental consciousness are home to companies that are less likely to engage in greenwashing, leading to fewer instances and less severe market reactions.

Results can also be influenced by sharp differences in regulatory quality and enforcement. Companies in countries with more rigorous enforcement of environmental disclosure requirements and anti-greenwashing regulations might see more severe market reactions due to the higher perceived risk of penalties. Over time, the increasingly negative response to greenwashing suggests a growing demand for transparency from businesses about their environmental practices. Policymakers could introduce or strengthen regulations requiring companies to disclose relevant environmental information, and regulatory bodies could enforce these rules more vigorously. To prevent greenwashing, regulators could enforce stricter rules on environmental claims made by companies. This could involve tighter definitions of what constitutes “green” or “sustainable” and stiffer penalties for misleading claims.

Interestingly, results indicate a marked shift in investor sentiment since 2010. The negative repercussions of greenwashing intensified during this period, indicating a heightened sensitivity among stakeholders. One cannot overlook the coincidental growth in identified events alongside digital technological advancements during this period, which likely played a pivotal role, particularly surrounding the availability and growth of social media through which such broad reputational damage can occur with incredible speed and efficiency. Such evidence underscores a collective disapproval of deceptive environmental claims. The cognitive dissonance between rising global environmental awareness and deceptive corporate practices might exacerbate an adverse investor reaction. Moreover, as information asymmetry diminishes as a result of better regulation and greater use of  social media, investors are better equipped to discern and penalize greenwashing more swiftly, noting that such asymmetric reduction coincides with an elevated risk of corporate damage due to misinformation. However, aligning investor sentiment with global environmental consciousness quite broadly reflects a paradigm shift in whether the public views companies as trustworthy and responsible.

Restoring Trust After Greenwashing

Integrating green finance principles is paramount, where ESG and CSR considerations guide investment decisions towards sustainable ventures and inform broader economic policies that nurture environmentally friendly industries. This global significance is magnified by international collaborations such as the Paris Agreement, which emphasizes policy harmonization and shared best practices against greenwashing to protect the environment. Maintaining trust between corporations and stakeholders is essential, necessitating the creation of transparent information sources to verify environmental claims and prevent public deception. Internal transparency improvements are also vital, with whistleblowers playing an important role in exposing deceptive practices; policies protecting them help mitigate greenwashing through the threat of severe corporate punishment and reputational damage.

From a regulatory perspective, our results emphasize the need for a multi-faceted regulatory response to greenwashing.The market responses in different regulatory environments highlight the need to strengthen regulation. Furthermore, the disparities in market reactions across nations underscore the significance of harmonizing regulations, which would eliminate the possibility of companies leveraging regulatory differences across regions and would ensure a consistent and rigorous global stance against deceptive practices.

Our research underscores potential concerns regarding regulatory arbitrage, an issue that can be especially pertinent for multinational corporations. Companies with expansive operations across various jurisdictions can arrange to make disclosures only in lenient jurisdictions, putting corporations that operate in more stringent regulatory environments at a disadvantage.

ENDNOTES

¹Simultaneously, we posit that not all industries bear the same reputational burden. Industries inherently linked to environmental concerns, such as energy and manufacturing, might be held to a more discerning view concerning environmental claims, and our research attempts to measure the depth of this disparity. Beyond regulatory and industry-specific characteristics, nations’ broader societal and environmental ethos emerges as a pivotal influence, steering corporate and investor behavior.

²Detailed results of this analysis can be found in Akyildirim, E., Corbet, S., Ongena, S., and Oxley, L., 2023. “Greenwashing: Do Investors, Markets and Boards Really Care?” Swiss Finance Institute Research Paper 23-90.

³This approach isolates abnormal returns pre- and post-event, enabling a granular analysis of greenwashing’s impact on corporate valuations in both short- and medium-term windows.

⁴Data reveals that high-severity greenwashing events lead to immediate, statistically significant declines in stock returns, with these effects more pronounced than in lower-severity cases.

This post comes to us from Erdinc Akyildirim at the. University of Zurich and Nottingham University Business School; Shaen Corbet at Dublin City University and the University of Waikato; Steven Ongena at the University of Zurich, the Swiss Finance Institute, KU Leuven, NTNU Business School and the Centre for Economic Policy Research (CEPR); and Les Oxley at the University of Waikato. It is based on their recent paper, “Greenwashing: Do Investors, Markets and Boards Really Care?” available here.