Greenwashing in ESG disclosure: An empirical study on global large-cap companies

This post has been contributed by Dr Ellen Yu, Lecturer in Accounting and Financial Management, Birkbeck, Department of Management

There is little literature focusing on companies’ disclosure of their environmental, governance, and social (ESG) outcomes, but there is a growing call for investors to consider ESG holistically in their investment strategies. Due to rising demand, the disclosure of ESG data has increased dramatically in the last decade. In practice, the ESG data disclosed by firms is often unaudited. As not all ESG disclosure instruments are mandatory, companies can opt out entirely or disclose their favourite data only. Consequently, companies may not convey their ESG performance to the relevant stakeholders completely and truthfully. Due to the variation of the quality and the content of ESG data in nonfinancial reports, it is challenging for investors to incorporate ESG information into their asset selection process.

In our research project, we extend the theory of greenwashing by investigating large-cap companies’ greenwashing behavior in all aspects of ESG. This is the major difference between our study and the prior literature in greenwashing. Previous studies focus on evaluating the greenwashing issue for each dimension separately. We re-define greenwashing as companies masking their less impressive overall ESG performance by disclosing large amounts of ESG data to manage stakeholder parties’ perception. We focus on ESG data disclosure at the firm-level. By establishing a peer-relative greenwashing score, we are able to estimate the extent of a firm’s greenwashing behaviour in ESG dimensions holistically. Our dataset is comprised of more than 1900 large-cap companies across 47 countries and territories during the period of 2012-2016. Our empirical evidence shows that large-cap firms exposed to greater scrutiny are less likely to engage in ESG greenwashing. We suggest that ownership and governance factors are essential in dissuading firms’ ESG greenwashing behaviour.  

We define “greenwashers” as companies which perform poorly in ESG aspects but reveal large quantities of ESG data, arguably to obfuscate the public. We use the Bloomberg ESG Disclosure Score to measure the quantity of ESG data disclosed by firms. The Bloomberg disclosure score for each firm is comprised of more than 900 key disclosure indicators, such as total energy consumption, hazardous waste, political donations, and board meeting attendance. As an indicator of a firm’s performance in ESG issues, we adopt the Asset4 ESG performance scores by Thomson Reuters. The Asset4 ESG performance scores evaluate more than 600 data points per firm, ranging from employment quality to emission reduction. Both ESG performance and disclosure scores range between 0 and 100. However, in order to generate a meaningful comparison between the disclosure score and performance scores, we re-weight the performance scores using the weighting scheme for the disclosure scores.

We estimate the peer-relative greenwashing score for each firm in two steps. Firstly, we normalize them to the same scale by subtracting the average and dividing by the standard deviation. A firm’s peer-relative greenwashing score is calculated as the difference between its normalized ESG disclosure and its normalized ESG transparency score. Finally, we identify a firm as greenwashing if this firm has a better relative position than its peers in its ESG disclosure score than in its ESG performance score. This firm’s greenwashing score will be positive. Conversely, firms with negative greenwashing scores play down their environmental achievements. The median peer-relative greenwashing score is 0.059, while the mean of our dataset is 0.04. It implies that many large-cap firms pursue a greenwashing strategy (overstate their achievement in ESG issues).

Table 1 shows peer-relative greenwashing scores in the ten GICS sectors. We exclude the financial sector because financial regulations may heavily influence companies’ ESG disclosure. Our empirical results indicate that the peer-relative greenwashing scores are very industry-dependent. For instance, the Materials (0.1522), Energy (0.1477), and Utilities sectors have the highest peer-relative greenwashing scores among the ten GICS sectors. In contrast, the firms in the following three sectors understate their ESG performance: Industrials (-0.0363), Consumer staples (-0.0455), and Telecommunication services (-0.1202). Our findings imply that companies in the Materials sector is more likely to greenwash in ESG issues.

Table 1 Greenwashing scores

GICS sectorGreenwashing scores  
Materials0.15 (0.82)
Energy0.14 (0.69)
Utilities0.12 (0.81)
Healthcare0.07 (0.69)
Real estate0.05 (0.73)
Consumer discretionary0.05 (0.78)
Information technology0.03 (0.82)
Industrials-0.03 (0.81)
Consumer staples-0.04 (0.84)
Telecommunication services-0.12 (0.68)
The mean of the whole sample is 0.04, while the median is 0.059.

Source: Authors’ estimations. A greater value of the greenwashing score implies more distinct greenwashing behaviour.

We now turn to the possible mechanisms which can mitigate large-cap firms’ greenwashing behavior. Our hypotheses are based on the notion that a company is less likely to greenwash in ESG dimensions because it encounters pressure and oversight from relevant stakeholder parties.

Our empirical results indicate that the shares of independent directors and institutional investors matter, although the size of the board has no effect in deterring ESG greenwashing. Specifically, we find that a 1% rise in the percentages of independent directors can reduce ESG greenwashing by 0.85%, while a 1% growth in the percentage of institutional ownership can cut ESG greenwashing behavior by 0.36%. We show that scrutiny from both firm-level factors, independent directors and institutional investors, have a significant influence on firms’ ESG greenwashing behavior. These results are consistent with our predictions that companies are less likely to engage in ESG greenwashing when relevant stakeholder parties scrutinize a company’s relation between actual ESG performance and ESG disclosure. Moreover, our results offer empirical support for the notion that supervision from institutional investors and independent directors are complements for one another.

We also investigate whether greater scrutiny and pressure from the public can result in more trustworthy corporate ESG disclosures. Given the evidence from the previous studies, we would expect that companies will be less likely to engage in ESG greenwashing in countries with more political rights and less corruption.

We find empirical support for the hypothesis, which suggests that a less corrupted country is more likely to offer more opportunities for relevant stakeholders to lower the extent of greenwashing.  The empirical results indicate a 1% increase in the “absence of corruption” variable (i.e. the country experiences less corruption) results in 0.60% less greenwashing in ESG issues.

Surprisingly, our results for the “political rights” variable challenges the consensus that significant political rights enable stakeholders to discourage a firm’s ESG greenwashing behavior. This counterintuitive finding is in line with prior literature, which indicates that organizations are able to secure financial rewards and legitimacy by adopting symbolic actions without truly changing their practices. While countries with greater political rights allow their citizens to speak up about ESG concerns by using the various media, non-governmental organizations or environmental organizations, large companies are also given more power to sway public opinion through political actions such as lobbying efforts or seeking the legitimacy of corporate green branding.


We set out to enhance our understanding of the varied factors that impact large-cap firms’ greenwashing behavior. Based on our empirical results, we suggest the following mechanisms to be adopted to disuade firms’ ESG greenwashing behavior: more independent directors, more institutional investors, and more influential public interests through a less corrupted country system. Our findings offer support for the stewardship model of ownership. A company engages less in ESG greenwashing when its stakeholders apply closer scrutiny over the linkage between the amount of disclosed ESG data and its real ESG performance. Therefore, we suggest that large-cap companies should aim for responsible and effective active ownership, e.g. by attracting more institutional investors and independent directors on the board.

For the larger study, see: Yu, E. P., Luu, B.V., and Chen. C.H. (2020) Greenwashing in environmental, social and governance disclosures? Research in International Business and Finance, DOI 10.1016/j.ribaf.2020.101192.