The Agency of Greenwashing

Gianfranco Gianfrate, Professor of Finance at EDHEC Business School and Research Director at EDHEC-Risk Climate Impact Institute

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As climate change and global warming are addressed by tougher regulation, new emerging technologies, and shifts in consumer behaviors, companies are increasingly acknowledging climate resilience as a key aspect of their strategy (Aldy and Gianfrate, 2019). Investors (Du, 2015; Dyck et al., 2019), customers (Nyilasy, Gangadharbatla and Paladino, 2014; Szabo and Webster, 2021), and other stakeholders (Pizzetti, Gatti and Seele, 2021) are exerting growing pressure on firms to disclose the exposure to climate risks as well as the actions taken to manage those risks. However, the greater the role for sustainability performance disclosure, the greater the opportunities and incentives for firms to greenwash their behaviors (Laufer, 2003; Lyon and Maxwell, 2011; Marquis, Toffel and Zhou, 2016).

By definition, greenwashing is hard to measure (Marquis, Toffel and Zhou, 2016; Szabo and Webster, 2021). We contribute to the debate about greenwashing measurement by proposing a novel approach to quantify it that involves contrasting ex-ante intentions with ex-post outcomes on environmental policies.

It has also been documented that traditional agency problems (Ross, 1973) are linked to corporate social responsibility (CSR), one example being corporate philanthropy (Masulis and Reza, 2015). Greenwashing, as an aspect of CSR, can have an impact on management’s decision-making (Ferrón-Vílchez, Valero-Gil and Suárez-Perale, 2021). The extent to which corporate governance mechanisms – especially at board level – are associated with environmental practices is also receiving growing attention because of the intensified debate about CSR regulation. Some contributions suggest that governance mechanisms can reduce the mismatch between investors’ desires and firms’ choices regarding environmental performance (Dyck et al., 2020). However, we still lack a comprehensive view on whether and how corporate governance mechanisms that mitigate agency costs are associated with greenwashing. We fill this gap by investigating whether corporate governance features that reduce agency problems are associated with greenwashing.

We provide evidence of associations between corporate governance characteristics and greenwashing behaviors. We show that companies with larger boards are less prone to greenwashing, thanks to more efficient monitoring (Bebchuk, 2005; Chakraborty and Yilmaz, 2017). Board independence appears to be positively associated with greenwash behaviors. This apparent paradox is consistent with the idea that insider-controlled boards can be more beneficial to the financial performance of companies than boards with many independent directors (Harris and Raviv, 2005, 2008, 2010). Agency problems are in turn related to corporate voluntary disclosure (Eng and Mak, 2003; Leung and Gul, 2004) and thus to greenwashing. On the other hand, the percentage of women on the board has no detectable impact on the extent to which firms practice greenwashing.

We also examine the relationship between the degree of greenwashing and the market value of firms. Importantly, we find that negatively greenwashing affects firm value, thus showing that opportunistic environmental disclosure is penalized by financial markets (Du, 2015).

Our findings provide room for future research and regulation. It is crucial to find governance mechanisms that provide executives with the right incentives to avoid greenwashing activities that are detrimental both to companies and society. Our results are also of relevance for regulations and designing sustainability disclosure standards and frameworks.


Access Gianfranco's working paper "The Agency of Greenwashing".