Can Investors Curb Greenwashing?

At Covalence, we are pleased to have provided data used in this very interesting academic paper by a team of researchers of Institut Polytechnique de Paris.

We show how investors with pro-environmental preferences and who penalize revelations of past environmental controversies impact corporate greenwashing practices. Through a dynamic equilibrium model with information asymmetry, we characterize firms’ optimal environmental communication, emissions reduction, and greenwashing policies, and we explain the forces driving them. Notably, under a condition that we explicitly characterize, companies greenwash to inflate their environmental score above their fundamental environmental value, with an effort and impact increasing with investors’ pro-environmental preferences. However, investment decisions that penalize greenwashing, policies increasing transparency, and environment-related technological innovation contribute to mitigating corporate greenwashing. We provide empirical support for our results. (…)

In practice, we propose a two-step empirical method for analyzing companies’ environmental communication policies and testing their dynamics in cross-section. To do so, we use monthly data from the data provider Covalence, which constructs an environmental reputation score, an environmental controversy score, and an environmental performance score from published news.” More…

Source: SSRN