What You See Is Not What You Get: ESG Scores and Greenwashing Risk

[The ESG ratings credibility problem 2/5]

Do high ESG scores actually reduce greenwashing risk?

Manuel C. Kathan, Sebastian Utz, Gregor Dorfleitner, Jens Eckberg, and Lea Chmel investigate whether high ESG scores signal lower greenwashing risk in their paper "What you see is not what you get: ESG scores and greenwashing risk".

They collect 417 greenwashing cases for the STOXX 600 constituents from 2015 to 2023, score each case for severity, and decompose corporate environmental performance into apparent (what firms claim) and real (what firms actually do) components.

Their main conclusions include:

• Companies with high ESG scores and large size face the most greenwashing accusations in the sample. The highest frequencies appear in utilities (16% of companies) and energy (12%), followed by consumer-facing industries.
• LSEG ESG scores correlate at 57% with what companies claim about their environmental efforts, but at negative 26% with what companies actually do.
• Greenwashing risk itself correlates positively with ESG scores, at 37% for LSEG and 28% for Bloomberg. Higher disclosure scores also track with greater greenwashing risk, particularly among large companies.
• The average apparent environmental performance rose by roughly 40% between 2015 and 2023, while real environmental performance remained essentially flat.
• Higher analyst coverage narrows the gap between apparent and real environmental performance, and the effect is statistically and economically stronger for small companies, carbon-intensive firms, and those in brown industries.

This article aligns with the broader critique that ESG ratings measure risk to the firm from sustainability issues, not the firm's impact on the world, a distinction central to the EU ESG Rating Regulation that applies from 2026.

Under SFDR disclosure rules and growing regulatory scrutiny of sustainability marketing, asset managers applying ESG screening to reduce reputational risk may be doing the opposite of what they intend.

Promoting funds as sustainable on the basis of aggregate ESG scores exposes managers to regulatory risk, since greenwashing incidents cluster in the very high-score portfolios marketed as low-risk.

Regarding the controversies sample, detection depends on whether an incident was publicly reported and indexed online, with a bias towards English-language coverage of large European listed firms.

This means the absolute frequency of greenwashing is almost certainly understated, and private, unlisted or emerging-market issuers are less visible to the analysis.