Murdoch Study: Greenwashing Undermines Long-Term Financial Stability

A new study from Murdoch University indicates that companies engaging in greenwashing do not achieve durable long-term financial stability. Greenwashing refers to the discrepancy between a firm's stated environmental performance and its actual environmental actions.\n\n## Context\n\nThe rise of Environmental Social Governance (ESG) investing has led lenders to prioritize firms' sustainability performance when allocating capital, making ESG scores a significant measure for investors assessing risk. However, ESG scores do not always accurately reflect a firm's true environmental performance. Firms may greenwash to gain reputational benefits, attract investors, and appear less risky without necessarily reducing their carbon footprint.\n\n## Study Details\n\nThe study examined Australian companies from 2014 to 2023. Researchers developed a quantitative framework to measure greenwashing by directly comparing ESG scores with carbon emissions. This allowed them to identify inflated sustainability claims. The study then analyzed how greenwashing affected a company’s financial stability, specifically its stock market volatility.\n\n## Key Findings\n\n* Greenwashing enhances firms' stability in the short term, as strong ESG signals are interpreted as safety by investors.\n* This short-term benefit diminishes over time as discrepancies between ESG claims and actual emissions become evident, leading to market corrections and weakened stabilizing effects.\n* Greenwashing was a persistent trend among Australian firms from 2014-2022, with reported ESG scores often higher than justified by actual carbon emissions.\n* A decline in greenwashing was observed in 2023, attributed to stronger ASIC enforcement, mandatory climate-risk disclosures starting in 2025, and increased investor scrutiny.\n\n## Implications\n\nThe study's findings carry implications for various stakeholders:\n\n* Regulators: The results support tighter ESG disclosure standards and stronger anti-greenwashing enforcement to prevent misleading sustainability claims from distorting risk pricing.\n* Investors: The findings highlight the importance of examining firms' environmental claims against their actual emissions, rather than relying solely on headline ESG scores.\n* Companies: Greenwashing may provide short-term credibility, but genuine emissions reduction and transparent reporting are more effective for managing long-term risk.\n\nThe research paper, titled "False Stability? How Greenwashing Shapes Firm Risk in the Short and Long Run," is publicly available in the Journal of Risk and Financial Management.