Greenwashing in environmental, social and governance disclosures

Abstract

The environmental, social, and governance (ESG) data provided in firms' sustainability reports is often unaudited. If ESG information disclosed by firms is not reliable, a firm's greenwashing behavior can be a barrier to integrating ESG factors into investment decisions.In this paper, we study mechanisms to lessen firms' greenwashing behavior in ESG dimensions holistically. Firstly, we identify "greenwashers" as firms which seem very transparent and reveal large quantities of ESG data but perform poorly in ESG aspects. By creating peer-relative greenwashing scores for a cross-country dataset comprised by 1925 large-cap firms, we measure the extent to which large-cap firms engage in greenwashing. We find evidence that greenwashing behavior in ESG dimensions can be deterred by scrutiny from (a) independent directors, (b) institutional investors, (c) influential public interests via a less corrupted country system, and (d) being cross-listed. Our results suggest that the two firm-level governance factors are most effective at attenuating firms' misleading disclosure relating to ESG dimensions.

Greenwashing Behaviours: Causes, Taxonomy and Consequences Based on a Systematic Literature Review

“…Even if shareholder benefits outweigh the loss of consumers, the benefits of society as a whole will be reduced, which can clearly be seen from the perspective of resource allocation and social welfare (Ramesh & Rai, 2017). This further demonstrates that regulators need to intervene to mitigate the negative consequences of greenwashing for society as a whole (Sun & Zhang, 2019;Yu et al, 2020;Uyar et al, 2020).…”

“…Most discussions focused on greenwashing in corporate environmentalism practices and the issue of politics (Luke, 2008;Coates et al, 2011;Harris, 2015;Alons, 2017;Sun & Zhang, 2019). Besides, a variety of other topics were examined as corporate communication, environmental issues, corporate social responsibility (CSR), accounting and finance, business ethics and education (Ackers, 2009;Jones, 2012;Ariztía et al, 2014;Kim & Lyon, 2015;Rahman et al, 2015;Du et al, 2018;Uyar et al, 2020;Yu et al, 2020). The term "greenwashing" was coined by New York environmentalist Jay Westervelt in 1986 (Romero, 2008).…”

“…It involves various communication strategies that include selective and incorrect disclosure (Cho & Patten, 2007;Lyon & Maxwell, 2011;Mccrory & Langvardt, 2012;Geerts, 2014), as unfinished assessments or vague and incorrect statements (TerraChoice, 2009). In addition, another method of diverting attention in CSR communication is undefined disclosure, which occurs when corporations highlight the importance of a product, without explanation (Snyder, 1989;Relaño, 2011;Gamper-Rabindran & Finger, 2013) or in the absence of detailed information and trustworthy accreditations, approved by a third party (Matejek & Gössling, 2014;Yu et al, 2020).…”

“…The outcome is that greenwashing endangers investor confidence and provokes negative market feedback. Finally, if the environmental, social, and governance information disclosed by firms is not reliable, a firm's greenwashing behaviour can be a barrier to integrating the environmental, social, and governance factors into investment decisions (Yu et al, 2020). The effect of greenwashing on the relationships with these stakeholders will eventually lead to a decline in financial performance, detrimental to investment (Pizzetti et al, 2019).…”

The revision of nonfinancial reporting directive: A critical lens on the comparability principle

“…promote the balance between financial and CSR objectives (Arayssi, Jizi, & Tabaja, 2020). In addition, prior studies highlighted that the independency of the BoD represents an effective driver to detect greenwashing (Yu, Van Luu, & Chen, 2020).…”