Companies that exaggerate their environmental credentials to attract investors receive a short-term stock-market boost, but the safety it provides is illusory and doesn’t last.
A new study from Murdoch University reveals that while “greenwashing” can make a firm appear financially stable and low-risk in the short term, this effect fades as the market uncovers the truth.
As Environmental Social Governance (ESG) investing surges globally, capital is increasingly flowing to sustainable businesses. However, researchers found that the ESG scores investors rely on often fail to reflect a company’s actual environmental impact.
“In simple terms, it is when companies talk green but do not act green,” said Tanvir Bhuiyan, Associate Lecturer in Finance at the Murdoch Business School.
“Firms do this to gain reputational benefits, attract investors, and appear lower-risk and more responsible without necessarily reducing their carbon footprint”.
The illusion of safety
The researchers analysed Australian companies between 2014 and 2023 to assess the gap between firms’ sustainability claims and their actual performance.
By creating a framework that directly compared ESG scores with carbon emissions, the team identified instances where sustainability claims were inflated. They then tracked how this “greenwashing” impacted the companies’ stock market volatility.
The findings show that greenwashing creates a “false stability”.
“In the short term, firms that exaggerate their ESG credentials appear less risky in the market, as investors interpret strong ESG signals as a sign of safety,” Bhuiyan said.
“However, this benefit fades over time. When discrepancies between ESG claims and actual emissions become clearer, the market corrects its earlier optimism, and the stabilising effect of greenwashing weakens”.
Crackdown is working
The study also tracked the prevalence of the practice, finding that greenwashing was a “persistent trend” for Australian firms from 2014 to 2022.
“On average, firms consistently reported ESG scores that were higher than what their actual carbon emissions would justify,” said Dr. Ariful Hoque, a Senior Lecturer in Finance who worked on the study.
However, the data showed a noticeable decline in greenwashing in 2023. Hoque attributes this shift to stronger enforcement from the Australian Securities and Investments Commission (ASIC) and impending mandatory climate-risk disclosure policies set to begin in 2025.
“This implies that regulatory pressure is beginning to curb inflated ESG reporting,” Hoque said.
Advice for the market
The researchers hope the findings will serve as a wake-up call for regulators and investors alike.
“For investors, the findings highlight the importance of looking beyond headline ESG scores and examining whether firms’ environmental claims match their actual emissions,” Hoque advised.
“For companies, this research indicates that greenwashing may buy short-term credibility, but genuine emissions reduction and transparent reporting are far more effective for managing long-term risk”.
