Can investors curb greenwashing?

Fanny Cartellier (), Peter Tankov () and Olivier Zerbib
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Fanny Cartellier: UZH - Universität Zürich [Zürich] = University of Zurich
Peter Tankov: CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - GENES - Groupe des Écoles Nationales d'Économie et Statistique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - GENES - Groupe des Écoles Nationales d'Économie et Statistique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique
Olivier Zerbib: CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - GENES - Groupe des Écoles Nationales d'Économie et Statistique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - GENES - Groupe des Écoles Nationales d'Économie et Statistique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique

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Abstract: 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, we characterize firms' optimal environmental communication, green investments, and greenwashing policies, and we explain the forces driving them. Notably, under a condition that we explicitly characterize, companies greenwash to inflate their environmental rating above their fundamental environmental value, with an effort and impact increasing with investors' proenvironmental 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.

Keywords: Greenwashing; Sustainable finance; Asset pricing; ESG investing; Impact investing (search for similar items in EconPapers)
Date: 2025-10-07
Note: View the original document on HAL open archive server: https://hal.science/hal-05415062v1
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Published in Journal of Economic Dynamics and Control, 2025, 180, pp.105195. ⟨10.1016/j.jedc.2025.105195⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05415062

DOI: 10.1016/j.jedc.2025.105195

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