Can Investors Curb Greenwashing?

123 Pages Posted: 1 Dec 2023 Last revised: 27 Mar 2024

See all articles by Fanny Cartellier

Fanny Cartellier

Institut Polytechnique de Paris

Peter Tankov

ENSAE, Institut Polytechnique de Paris

Olivier David Zerbib

CREST, ENSAE, Institut Polytechnique de Paris

Date Written: November 26, 2023

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 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.

Keywords: Greenwashing, sustainable finance, asset pricing, ESG investing, impact investing.

JEL Classification: G11, G12, G24.

Suggested Citation

Cartellier, Fanny and Tankov, Peter and Zerbib, Olivier David, Can Investors Curb Greenwashing? (November 26, 2023). Available at SSRN: https://ssrn.com/abstract=4644741 or http://dx.doi.org/10.2139/ssrn.4644741

Fanny Cartellier

Institut Polytechnique de Paris ( email )

Peter Tankov

ENSAE, Institut Polytechnique de Paris ( email )

Palaiseau
France

Olivier David Zerbib (Contact Author)

CREST, ENSAE, Institut Polytechnique de Paris ( email )

5 Avenue Le Chatelier
Palaiseau, Paris 91120
France

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