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HomePaperCan Investors Curb Greenwashing?

Can Investors Curb Greenwashing?

12 January 2024
Authors: Peter Tankov (ENSAE, Institut Polytechnique de Paris), Olivier David Zerbib (ENSAE, Institut Polytechnique de Paris) and Fanny Cartellier (ENSAE, Institut Polytechnique de Paris)
Presenter: Peter Tankov (ENSAE, 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.

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