How Greenwashing Affects Firm Risk: An International Perspective

Abstract

The effects of greenwashing as a corporate strategy on firm risk are not well defined. I construct a greenwashing measure for 3973 companies from 70 countries from 2012 to 2022. Using Dynamic Panel Modeling, I find results suggesting that greenwashing is a complex phenomenon with both positive and negative consequences. While it can improve a firm’s public image and potentially enhance its financial performance, it may also lead to increased risk and misallocation of resources. Greenwashing firms have a lower weighted average cost of capital due to a higher debt-to-capital ratio. They are larger, have higher institutional ownership, and lower dividend yields. On the other hand, greenwashing firms have more ESG-related controversies that can hurt firm revenues and market value, they have higher unsystematic risk, and they have lower dividend yields and return on equity. I also find evidence that there is a feedback relationship between ESG ratings and greenwashing. There is no evidence that government mandates on ESG reporting inhibit greenwashing. The implication is that ESG scoring that emphasizes reporting ESG activities while informing investors also encourages greenwashing.

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