Companies that engage in greenwashing to present themselves as more attractive to investors do not achieve lasting financial stability over time, according to a recent study from Murdoch University. The research highlights how firms that exaggerate their environmental credentials may benefit briefly from improved market perceptions, but these gains are temporary and ultimately fragile. As sustainability becomes more central to investment decisions, misleading claims increasingly expose companies to long-term financial risk rather than protecting them from it.

In recent years, Environmental, Social and Governance (ESG) investing has expanded rapidly across global markets. Investors and lenders now routinely consider a firm’s sustainability performance when allocating capital, using ESG scores as a proxy for risk, responsibility, and resilience. Strong ESG ratings are often interpreted as indicators of good management and lower exposure to regulatory or environmental shocks. However, the study stresses that these scores do not always accurately reflect a company’s real environmental impact, particularly when reporting is selective or strategically framed.

Greenwashing is defined in the research as the gap between what companies claim about their environmental performance and how they actually behave. In practical terms, it refers to firms presenting themselves as environmentally responsible without making meaningful reductions to emissions or operational practices. Companies adopt this approach to enhance their reputation, appeal to ESG-focused investors, and appear safer or more ethical, all while avoiding the costs associated with genuine environmental transformation.

The study examined Australian companies over the period from 2014 to 2023 to assess how greenwashing influences financial stability and market risk. To do this, the researchers developed a quantitative framework that directly compared firms’ ESG scores with their reported carbon emissions. This method allowed them to identify instances where sustainability claims were inflated relative to actual environmental performance. The researchers then analysed how these discrepancies affected stock market volatility as a measure of corporate stability.

The findings show that greenwashing can create an illusion of stability in the short term. Firms with exaggerated ESG credentials often appear less risky, as investors respond positively to strong sustainability signals. This market optimism can temporarily reduce volatility and support share prices. However, the effect does not last. Over time, as inconsistencies between ESG narratives and absolute emissions become clearer, investor confidence weakens. The market adjusts its earlier assumptions, and the stabilising influence of greenwashing fades.

The research also found that greenwashing was a persistent pattern among Australian firms between 2014 and 2022, with ESG scores frequently overstating environmental performance. A noticeable decline emerged in 2023, likely driven by stronger regulatory scrutiny, anticipated climate-risk disclosure requirements, and heightened investor awareness. The study concludes that while greenwashing may offer short-term credibility, it undermines accurate risk pricing and long-term stability. For regulators, investors, and companies alike, the message is clear: transparent reporting and genuine emissions reductions are far more effective for managing risk and building sustainable financial resilience.

More information: Rahma Mirza et al, False Stability? How Greenwashing Shapes Firm Risk in the Short and Long Run, Journal of Risk and Financial Management. DOI: 10.3390/jrfm18120691

Journal information: Journal of Risk and Financial Management Provided by Murdoch University