Does It Pay to Be a Greenwasher or a Brownwasher?

Is brownwashing worse than greenwashing?

Francesco Testa, Ivan Miroshnychenko, Roberto Barontini, and Marco Frey study firms that both overstate and underreport the environmental achievements in their article "Does it pay to be a greenwasher or a brownwasher?".

They conducted an empirical analysis using a panel of 3,490 publicly traded companies from 58 countries and 19 industries over the period 2002-2014 to compare the discrepancy between green practices and green communications.

This study helped them identify greenwashing and brownwashing behaviours and conclude that:

• Greenwashing strategies do not lead to higher corporate financial performance, and brownwashing strategies are associated with lower corporate financial performance.
• The coefficient for the greenwashing variable was negative but not statistically significant across all corporate financial performance measures.
• Effective green practices have a positive and statistically significant effect on both market-based (Tobin's Q and MBVE) and accounting-based (ROE and ROA) financial performance measures.
• The brownwashing variable had a negative and statistically significant effect on both market-based and accounting-based corporate performance measures.
• The negative impact of brownwashing on Tobin's Q and MBVE was more pronounced than its negative effect on ROE and ROA, suggesting a stronger market reaction to underreporting environmental achievements.

This article provides longitudinal empirical evidence on the financial implications of greenwashing and brownwashing strategies. Firms should both implement substantive green practices and communicate them in an effective and coherent way, as underreporting environmental achievements can harm financial performance just like greenwashing. Practitioners could however argue that the study does not fully account for specific factors that might influence the relationship between environmental communication strategies and financial performance.