Companies engaging in ‘greenwashing’ to appear more favourable to investors, don’t achieve durable financial stability in the long term, according to a new Murdoch University study.
Globally, there has been a rise in Environmental Social Governance (ESG) investing, where lenders prioritise firm’s sustainability performance when allocating capital.
As a result, ESG scores have become an important measure for investors when assessing risk.
“However, ESG scores do not always reflect firm’s true environmental performance,” said Tanvir Bhuiyan, Associate Lecturer in Finance at the Murdoch Business School.
Greenwashing refers to the gap between what firms claim about their environmental performance and how they actually perform.
“In simple terms, it is when companies talk green but do not act green,” Dr Bhuiyan said.
“Firms do this to gain reputational benefits, attract investors, and appear lower-risk and more responsible without necessarily reducing their carbon footprint.”
The study examined Australian companies from 2014 to 2023 to understand how greenwashing affects financial risk and stability.
To measure whether companies were exaggerating their sustainability performance, they created a comprehensive quantitative framework to measure greenwashing by directly comparing ESG scores with carbon emissions, allowing them to identify when sustainability claims were inflated.
They then analysed how greenwashing affected a company’s stability, by looking at its volatility in the stock market.
According to Dr Bhuiyan, the key finding from the research was that greenwashing enhances firms’ stability in the short term, but that affect fades away over time.
“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,” he 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.”
Dr Ariful Hoque, Senior Lecturer in Finance at the Murdoch Business School, who also worked on the study, said they also found that greenwashing was a persistent trend for Australian firms from 2014-2022.
“On average, firms consistently reported ESG scores that were higher than what their actual carbon emissions would justify,” Dr Hoque said.
However, in 2023, he said there was a noticeable decline in greenwashing, “likely reflecting stronger ASIC enforcement, mandatory climate-risk disclosures policy starting from 2025, and greater investor scrutiny”.
“This implies that regulatory pressure is beginning to curb inflated ESG reporting,” he said.
Dr Hoque said he hopes the findings from the study can influence companies, investors and regulators.
“For regulators, our results support the push for tighter ESG disclosure standards and stronger anti-greenwashing enforcement, as misleading sustainability claims distort risk pricing,” he said.
“For investors, the findings highlight the importance of looking beyond headline ESG scores and examining whether firms’ environmental claims match their actual emissions.
“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.”
The paper, False Stability? How Greenwashing Shapes Firm Risk in the Short and Long Run, is freely available in the Journal of Risk and Financial Management.
Journal
Journal of Risk and Financial Management
Method of Research
Data/statistical analysis
Subject of Research
Not applicable
Article Title
False Stability? How Greenwashing Shapes Firm Risk in the Short and Long Run
COI Statement
Author Rahma Mirza was employed by the company Rahma Mirza-Edge Research & Consulting. The remaining authors declare that the research was conducted in the absence of any commercial or financial relationships that could be construed as a potential conflict of interest
