An Empirical Study on the Impact of Corporate Greenwashing Behaviours on Financial Performance

Can greenwashing be profitable in the long term?

Bingshang Du, Jiangrui Hu, and Yujie Peng studied the relationship between greenwashing practices and financial metrics in their article "An Empirical Study on the Impact of Corporate Greenwashing Behaviours on Financial Performance".

They measured greenwashing using a peer-relative greenwashing score, calculated as the difference between a company's normalised ESG disclosure score and its normalised ESG performance score using a sample of 349 listed companies in China from 2017 to 2020.

Their main conclusions include:

• Companies with higher degrees of greenwashing exhibited lower financial performance, as measured by return on total assets (ROA).
• The study revealed that greenwashing behaviours can lead to increased costs for companies trying to cover up false environmental claims, ultimately harming financial performance.
• The negative impact of greenwashing on financial performance was robust to alternative measures, including return on equity (ROE) and lagged financial performance.
• The relationship between corporate greenwashing behaviours and financial performance is statistically significant at the 1% level, even controlling for factors such as company size, ownership structure, leverage ratio, capital intensity, growth capability, and R&D intensity.

The findings suggest that companies should focus on authentic environmental practices and be aware that attempts to mislead stakeholders about environmental performance can backfire.

Academics might question the study's reliance on ESG scores as a measure of greenwashing, given the ongoing debates about the reliability and consistency of ESG ratings from rating agencies.

Additionally, the negative financial impacts may be underestimated, as the study does not account for the potential short-term benefits of greenwashing, such as improved brand image or increased sales, which might offset some of the negative financial impacts in certain cases.