Keywords

1 Introduction

Sustainability is nowadays a central concept of environmental discourses. Although origins of sustainability can be traced back to the eighteenth century, when “sustainable yield” was first coined as a forestry term referring to the careful management of resources over time, it was in the 1980s and 1990s that “sustainable development” became a guiding principle for international political and social action (Grober 2010; Barnes Hoerber 2013; Seefried 2021). The World Commission on Environment and Development, established by the United Nations (UN) and known as the Brundtland Commission, advocated in its report “make[ing] development sustainable—to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs” (World Commission on Environment and Development 1987). Referring to this report, the UN Earth Summit, which took place in Rio in 1992, identified sustainable development as a central standard to be adhered to in international politics. Backed up by the circulating of expertise on anthropogenic climate change, the ensuing sustainable development discourse raised the awareness that ecological and developmental problems are closely interrelated. Since then, the terms “sustainable development” and “sustainability” have penetrated into the political, the social, and the economic language with considerable success. Not only have NGOs—such as the German Federation for the Environment and Nature Conservation (BUND)—espoused sustainability, stating that it should be the carrying capacity of the earth and ecological limits that determine the use of natural resources (Macekura 2015).

What is more, firms communicate sustainability primarily in order to balance the three pillars of sustainability, which encompass environmental, social, and economic aspects (whereby the latter are usually take the form of governance targets). In order to group these pillars together, the term “environmental, social, governance” (ESG) has been coined. In fact, since the mid-1990s, firms have been developing sustainability reports and practices that are increasingly replacing traditional methods of communicating Corporate Social Responsibility (Nuhn 2013; Froitzheim 2022). Committing to ESG allows firms to gain or to maintain legitimacy among their stakeholders (Nuhn 2013; Froitzheim 2022). Thus, the corresponding engagement of firms with the three ESG pillars has become a crucial factor for research and practice. Figure 1 sums up the most important aspects of each pillar.

Fig. 1
An illustration of the 3 dimensions of E S G and their main aspects. 1. Environmental including net zero, climate risk, and decarbonization. 2. Governance including board diversity and visibility. 3. Social including privacy, societal impact, and workforce.

Overview of ESG dimensions and their main aspects (own figure based on PricewaterhouseCoopers (o. D.) 2023)

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The growing relevance of the topic of ESG is further highlighted by the fact that institutional programs are starting to focus on shifting the economic activities toward the integration of ESG aspects into strategic political decision-making processes, thus enabling a “green” transformation. First, in the Paris Climate Agreement of 2015, a total of 196 countries committed themselves to limiting global warming to a maximum of 2 degrees Celsius. Each of the countries then submitted their individual measures or “nationally determined contributions” (NDCs) as well as specific long-term low greenhouse gas emission development strategies (LT-LEDS) for achieving this goal (Paris Agreement 2023). Additionally, the United Nations launched their Sustainable Development Goals (SDGs), covering 17 different targets that focus on the commitment to address major global environmental, societal, and economic challenges of current times. These 17 goals are part of the UN’s Agenda 2030 (“Transforming our world: the 2030 Agenda for Sustainable Development”), which was created in 2015, and they are intended to provide a framework for shaping a sustainable future. All UN member states are expected to achieve the SDGs by 2030. In their “UN SDG Tracker,” the UN provide various tools for monitoring goal achievement across the different indicators (available from https://sdg-tracker.org/) (Berrone et al. 2015). In a similar vein, the European Union adopted a Sustainable Finance Action Plan (SFAP) in 2021, with the aim of ensuring sufficient funding for innovations, projects, and firms which place a particularly strong emphasis on sustainable actions. Specifically, the SFAP is primarily focused on the reallocation of financial resources to firms and projects which are having a significantly positive impact on mitigating global warming. Accordingly, the related European Green Deal Investment Plan aims to shift funds of at least 1 trillion Euros into sustainable investment until 2030 (Overview of Sustainable Finance 2021). To summarize, such major projects led by international politics demonstrate the increased regulatory and societal pressure on firms to transition their activities toward more ecological sustainability. They also mirror the rising demand within society for such initiatives.

Given the outstanding importance of transitioning the economy toward sustainability, the monitoring of a firm’s performance within each individual ESG dimension is a major challenge of current times. However, it is also the vagueness of the sustainability concept that has made it so attractive for the public and in firm policy: Its meaning differs and the discourse has changed its direction, moving from degrowth to sustainable growth, from ecological concerns to ethical targets of leadership monitoring. As the concept of sustainability is open and ambiguous, it is all the more necessary to ascertain and disclose the degree to which firms communicate a pronounced (symbolic) ESG focus without actually backing such statements up with real (substantial) ESG engagement (Berrone et al. 2015). Due to the lack of audits for CSR reports and overarching mandatory disclosure, information asymmetry exists, which prevents stakeholders from validating firms’ claims, and which in turn allows firms the leeway to engage in corporate misbehavior. In the context of sustainability, corporate misbehavior is often referred to as “greenwashing.” More specifically, the Oxford English Dictionary defines greenwashing as “the creation or propagation of an unfounded or misleading environmentalist image” (greenwashing, n. 2023). Similarly, the Cambridge Dictionary states that greenwashing comprises the “behavior or activities that make people believe that a company is doing more to protect the environment than it really is” (greenwashing 2023).

It is the goal of this article to elaborate on the practice of greenwashing. To this end, Sect. 2 provides an overview of the state of the art of firms’ sustainability reporting. Section 3 explains how practice and research can detect greenwashing. Section 4 elaborates on the consequences of greenwashing. Section 5 examines the determinants of greenwashing, and Section 6 concludes with guidelines for avoiding greenwashing.

2 Firms’ Sustainability Reporting

While the importance of ESG-related engagement is constantly growing, the disclosure regulation for ESG is still insufficient to provide market participants with a sufficiently clear picture of firms’ activities in this domain (Ramus and Montiel 2005). For a long time now, institutional standards for the disclosure of firm-specific ESG performance have been a rarity. This has led to stakeholders having an informational deficit, which can then cause distrust on their part with regard to firms’ claims of sustainable activities. Against this backdrop, the European Union began tackling the existing information asymmetry by developing the Sustainable Finance Disclosure Regulation in combination with the respective Taxonomy for Sustainable Finance. In a nutshell, the regulation obliges financial market participants to disclose the ESG performance of their capital market products according to standards which are defined by the taxonomy. The intention of the regulation is to ease the decision-making process for investors who have an explicit interest in sustainable finance and thus to increase the flow of funds toward sustainable activities and projects (Renewed sustainable finance strategy and implementation of the action plan on financing sustainable growth (o. D.) 2023). However, due to its being limited to products in the financial services industry, the regulation, although providing a necessary starting point, does not ensure transparency on the ESG activities of firms from other industries. Further voluntarily applicable standards are tackling this challenge by delivering frameworks for the disclosure of ESG-related key performance indicators (KPIs) in a regulated manner. The most commonly applied framework is the one provided by the Global Reporting Initiative (GRI), which is an independent and globally active organization that tries to tackle the issue of disclosing non-financial firm-specific data in a standardized way. So far, thousands of firms from over 100 countries have voluntarily committed themselves to respecting these standards (Global Reporting Initiative 2019).

However, without mandatory disclosure or control mechanisms such as non-financial audits, inherent information asymmetry cannot be fully counteracted by voluntary disclosure. While misleading managerial behavior with regard to a firm’s balance sheets or financial statements is at least partially tackled through mandatory audits, to date no such rules exist for non-financial reporting. Under such circumstances, firms thus have the leeway to control, to a certain degree, their disclosure of ESG-related data. Under consideration of traditional signaling theory, successful lying should not be possible (Berrone et al. 2015), as all decision-makers are fully rational and can thus safeguard themselves against potentially lying transaction partners. In equilibrium, this would lead to firms having to publish all information truthfully. However, as research has shown, the decision-making of individuals is often impaired by irrational behavior and different behavioral biases, resulting in inefficient information processing. In turn, individuals might assess the trustworthiness of a signal incorrectly, which would consequently allow firms to exploit their informational advantage in order to intentionally mislead their stakeholders. This is done by exaggerating, misstating, or concealing information. As mentioned earlier, such behavior in the context of sustainability or ESG is often referred to as “greenwashing.”

Greenwashing can manifest itself in practically every form of corporate communication with a firm’s stakeholders: One form in which firms deceive their stakeholders is the direct form, e.g., via official reports, conference calls, conventional advertisements, or social media. Here, firms can place a particular focus on ESG-related topics and claim to have integrated such considerations into their strategic decision-making process. Stakeholders have limited possibilities of monitoring a firm’s compliance with such claims. Moreover, firms can also refrain from reporting any negative ESG news or controversy which—for the sake of transparency—should usually be mentioned in such communication channels. From the external stakeholders’ point of view, such behavior would be considered to be greenwashing, since information is being withheld which would otherwise be crucial to stakeholders because it directly impacts a firm’s reputation. Furthermore, greenwashing can also be observed on the product level. For example, claims of environmentally friendly packaging or production are often found on products nowadays. However, without dedicated certification, such claims are often not verifiable, a situation which enables firms to mislead their customers about the alleged sustainability of a product.

Greenwashing can also occur in advertisements for financial products, e.g., a certain capital market product claiming to be particularly green or claiming to fund sustainable activities, without the products actually fulfilling all the necessary standards. One prominent example of greenwashing in a case of this kind concerns one of Germany’s major players in the area of asset management. It allegedly declared various funds to be in line with the requirements for green investments according to the EU taxonomy. However, detailed investigations have recently shown that these guidelines had not been fully met (Gaur and Gaiha 2019). Finally, another aspect that may be viewed as greenwashing is the concealment of any non-ESG conformity of suppliers or other parts of a firm’s value chain. This is due to the “black box” character of many supply chains, where a lack of monitoring or traceability means that firms or their products might be depicted as “green” although parts of their value chains are polluting the environment.

In short, common definitions depict the act of greenwashing as firms “sugar-coating” their respective environmental engagement. However, while these concepts and the term “green” tend to only cover the environmental dimension, the idea of greenwashing can nowadays also be applied to the social or governance dimensions of ESG. For example, one widespread accusation is that firms are symbolically involved in political correctness, while actually refraining from any substantial corresponding engagement. Firms that change their social media accounts’ profile pictures to match current movements, such as using rainbow color schemes during Pride Month, have recently come in for criticism. It was pointed out that, in most cases, the firms were not applying any guidelines for diversity within their corporate cultures. Hence, publicly acknowledging the alleged importance of political correctness but failing to actually commit to this issue can only be perceived as marketing tactics of the respective firms.

3 Detection and Measurement of Corporate Greenwashing

A crucial part of examining corporate greenwashing is the possibility of actually identifying and potentially quantifying the level of greenwashing that a firm is practicing. So far, the most common approach to spotting this form of corporate misbehavior is evaluating each firm or product on a case-by-case basis. In order to do this, various particularities are highlighted by the literature, by practitioners, and by related NGOs or other organizations. Thus, in the following, we present the approaches that are most commonly used in practice or research, and we state the benefits as well as disadvantages of each measure.

To generate a broad picture of every form that greenwashing can take, UL (formerly TerraChoice) have assembled the so-called seven sins of greenwashing. This bold expression describes seven conspicuous features that stakeholders can become aware of in order to potentially identify greenwashing on a case-by-case basis. Regardless of whether one may deem this terminology for economic issues adequate or not, the indicators presented by UL can nevertheless be viewed as a guideline for stakeholders to critically assess the information provided by firms and to uncover potential misstatements. More detailed information about the “seven sins” as well as descriptions and examples can be found in Fig. 2.

Fig. 2
An illustration of U L's 7 sins of greenwashing. Sin of hidden trade-off, of no-proof, of vagueness, of worshipping false labels, of irrelevance, of lesser of 2 evils, and of fibbing are in the top-down order with brief descriptions for each.

UL’s seven sins of greenwashing (own figure based on Sins of Greenwashing|UL Solutions (o. D.) 2023)

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As depicted by these “seven sins,” greenwashing primarily exists through firms either making misleading claims or by remaining silent about potential controversies. In a similar vein, the “ten signs of greenwashing,” published by the consultancy agency Futerra, define ten different dimensions in which greenwashing might occur (see Fig. 3). First, firms could use so-called fluffy language, which might not actually consist of incorrect statements, but which lacks a clear meaning and is thus simply blurring the actual information. Furthermore, firms might release particularly sustainable products, which themselves may be “green” but which have environmental issues in some part of the firm’s value chain, i.e., a “dirty” firm is producing “green” products. Third, pictures that depict a rather sustainable image could be used to advertise products, without the products actually being aligned with common standards of environmental protection. Additionally, mentioning insignificant “green” attributes of products while the overall product is “brown” can again be seen as greenwashing. A best-in-class comparison is another form of greenwashing, as claiming to be the most sustainable firm within a controversial industry can mislead customers over the actual environmental performance of the firm involved. Accordingly, alleging that potentially harmful or controversial products are “green” is a further form of corporate greenwashing. Yet another form of greenwashing is the excessive use of technical words or specialized jargon which the majority of customers without the relevant educational or professional background in this specific field cannot fully understand. Further measures to mislead stakeholders include the usage of labeling on products which is designed to be close to true third-party certificates. Such labeling is intended to give customers a false sense of security by suggesting that the products are potentially certified, although they in fact lack external approvement. In addition, firms can also make other claims about a product that are simply not verifiable. Finally, the tenth sign of greenwashing according to Futerra is that of outright lies being told by firms about any relevant attribute of their products (Horiuchi et al. 2009). As can be seen, these ten aspects are closely related to UL’s seven sins of greenwashing, a relation which highlights the importance and significance of all the dimensions mentioned.

Fig. 3
An illustration of Futerra's 10 dimensions of greenwashing. Fluffy language, green products versus dirty company, suggestive pictures, irrelevant claims, best in class, just not credible, gobbledygook, imaginary friends, no proof, and out-right lying are in the top-down order.

Futerra’s ten dimensions of greenwashing (own figure based on Horiuchi et al. 2009)

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Although they are rather effective, case-by-case approaches are not very efficient, because each customer would have to analyze each product or service of interest by her- or himself, without making use of any exchange of information with other stakeholders. Thus, different programs, such as the earlier greenwashing index of Enviromedia (Voo 2010), are being developed in order to show what firms or products are associated with greenwashing. Anyone can submit greenwashing accusations to these programs, where the accusations are then looked into and published on an accumulated basis. Although the Enviromedia index was recently discontinued, other organizations have started to aggregate greenwashing accusations made against firms, such as Truth In Advertising (TINA) (2022), the Sustainable Agency (Akepa 2023), or Eco-Business (Hicks 2022). However, while undoubtedly a handy way for stakeholders to find out about any potential greenwashing engagement with a minimum of effort, a major downside of this type of ranking is the still rather subjective input. These organizations primarily rely on individual people alleging that a product, a service, or a firm is engaging in greenwashing, but without fully backing their accusations up with objective measures. Hence, such rankings are used more as a tool for depicting “perceived” greenwashing rather than using factual performance indicators. Additionally, they are usually a binary form of information because they only show whether a firm is engaging in greenwashing or not, but lack any possibility to quantify the degree of greenwashing. In this way, every form of greenwashing is treated similarly, so that, for example, imprecise claims about products lead to the same consequences as does purposely lying in claims about a product’s characteristics.

To tackle these challenges when measuring the degree of greenwashing, research has started to adopt new approximations to get a better picture of the extent of greenwashing on the firm level in empirical studies. Several “ESG scores” exist that are built and offered by various data providers and are intended to indicate a firm’s ESG performance. However, such an ESG score on its own is not suitable for detecting greenwashing, as it does not exhibit any information about the firm’s ESG communication. Thus, one common approach in related studies relies on the ESG disclosures of firms, since it is to be expected that firms which are voluntarily publishing information about their ESG engagement are more concerned about the potential reputational impact of such a focus (Mahoney et al. 2013). Some studies have looked into the length of the ESG reports of firms, proposing that the total extent of an individual report approximates the extent of greenwashing, as it shows that increased effort is being put into communicating a potential ESG focus (Yu et al. 2020). Another measure of greenwashing compares the total funds allocated to both ESG communication and substantial ESG activities. The higher the amount spent on marketing in relation to the underlying measures, the more likely it is that the firm is engaging in greenwashing instead of truthfully advertising its actual ESG engagement (Enviromedia Greenwashing Index|Green Wiki|Fandom (o. D.) 2023). However, this measure does not take into account the time horizon of costs, which might also be crucial for examining the amount spent on certain measures. For example, some ESG-related activities might not have high initial costs, but they do increase concurring expenses over a long time span. Yet, mentioning and highlighting those activities might lead to high marketing costs in the short run, with lower respective marketing costs in the future periods. Therefore, in such a case, a firm might be depicted as engaging in greenwashing in early periods, even when only using the communication channels to advertise its actual ESG engagement.

Another recently developed method to quantify the level of corporate greenwashing is based on textual analysis of specific kinds of corporate communication, such as earnings conference calls, 10-K reports, firm homepages, or social media. By utilizing word lists that identify terms directly associated with the topic of ESG, counting such words relative to the total word count of each transcription first enables a measure to be created for the level of corporate ESG communication. In the next step, ESG communication could be defined as a function of actual ESG performance that is measured by typical scores (e.g., those provided by Refinitiv, Bloomberg, or MSCI). Considering this proposed relation between both measures, the extent of ESG communication is evaluated in relation to the ESG score by using a regression model. In other words, this approach estimates a justified level of ESG communication based on a firm’s actual ESG performance. The part of ESG communication that exceeds this justified level is classified as greenwashing (Breuer and Hass 2022). While the utilization of standardized indicators does allow a quite objective measure, one major related concern is the lack of word lists on the topic of ESG topic, which limits the approach to English-language texts only.

In brief, stakeholders can choose from a broad portfolio of measures to identify potential greenwashing by firms or measure the degree to which firms engage in this practice, ranging from case-by-case-based examinations of individual characteristics across to academic measures applicable to large samples of firms. Each approach has its individual up- and downsides and should be selected specifically for each stakeholder’s use case.

4 Effects of Corporate Greenwashing

When looking at corporate greenwashing, the potential effects on the respective firm and its stakeholders are a crucial aspect to be taken into account. Thus, research within this area has begun to examine the relationship between firms’ engagement in greenwashing and a broad range of financial and non-financial key performance indicators.

According to current studies, customers do not appear to be as gullible as potentially ex-ante assumed by firms, meaning that stakeholders are apparently investing effort to detect any greenwashing by critically assessing information provided by and claims made by firms. This hints at the effectiveness of potential instruments for uncovering greenwashing on the product level, such as examining the “seven sins of greenwashing” individually. Moreover, it is to be expected that with increasing time horizons, the likelihood of stakeholders uncovering potential greenwashing will increase, thus reducing any benefits that greenwashing might have (Testa et al. 2018).

In a similar vein, even when greenwashing remains uncovered, research finds that the excessive amount of ESG communication used in the respective case can, in fact, lead to customer confusion, since stakeholders might not be fully able to differentiate between greenwashing and truthful advertising of the underlying attributes. Hence, customer confusion can prompt consumers to be skeptical about any ESG-related information, even if this information simply depicts truthful advertisement of substantial activities. A consequence of such confusion might then be the full exclusion of any ESG-related specifications from the customers’ decision-making process, as long as verification is not fully possible (see the “sin of no proof”) (Nyilasy et al. 2014). Beyond that, exaggerated ESG talk can increase stakeholders’ expectations of firms’ ESG performance and the green features of products. As such, greenwashing can increase the average proposed ESG focus and hence set a higher baseline for the minimal accepted level of ESG engagement (Luo et al. 2012). Combining such higher expectations with the underlying confusion about which information is trustworthy, theory suggests that increasingly skeptical stakeholders might demand, as proof, full disclosure of related information in support of a firm’s claims (Milgrom and Roberts 1986).

Turning to firms’ bottom lines, greenwashing can in fact reduce a firm’s operating performance, which is measured as the operating return on assets. This is due to customers and other stakeholders who have uncovered incidents of greenwashing and have cut their ties to the firm or who treat it unfavorably in various ways, because they feel cheated and are hence losing trust in the firm (Walker and Wan 2012).

Greenwashing can also impact shareholders’ perceptions of a firm and thus the firm’s market valuation. For example, the literature provides evidence of a detrimental effect of greenwashing on firms’ stock prices if the greenwashing has been discovered via external ratings: the greenwashing leads to significantly negative abnormal returns for the respective stocks (Du 2015). Further research looked into market reactions to greenwashing by only taking into account firms that are listed within dedicated “greenwashing rankings,” so that cases of greenwashing are included, which might not be detected by externals of the firm. In Breuer and Hass (2022), even a positive relation between a firm’s market value and greenwashing engagement is found over the period of one year. However, for longer time spans, the examination also shows that this effect turns negative and becomes more severe with increased time horizons. Consequently, assuming that investors do not exhibit lower levels of information processing than other stakeholders, it appears that investors do not react to the underlying excessive ESG communication itself, but to their expectations of the effect of such greenwashing on the overall firm performance. More specifically, while investors hence may assume a rather positive short-term effect of greenwashing, as soon as they discover its actual detrimental impact on a firm’s operating performance, they react accordingly, leading to a decrease in market valuation in the long run (Breuer and Hass 2022).

To sum up: the research so far has failed to find clear evidence for any potential benefit of greenwashing, showing mostly negative effects of this kind of corporate misbehavior. Hence, according to these insights, firms should obviously refrain from making use of greenwashing. However, as both research and examples from practice show, greenwashing still seems to be a widespread phenomenon that is utilized by a large number of firms. Nevertheless, it is difficult to determine the overall degree of greenwashing in a quantitative way.

5 Determinants and Reasons for Corporate Greenwashing

Given the prevalence of greenwashing, taking a look at its drivers is of particular interest. A broad range of determinants have been identified that can motivate managers to purposely misstate their firms’ ESG engagement in order to potentially mislead external stakeholders. Therefore, an analysis of the determinants of greenwashing also indicates reasons for this behavior. In general, managers will at least expect some kind of short-term benefits from greenwashing. The literature generally differentiates between four different main drivers that can be broken down into individual sub-factors influencing the level of greenwashing, as can be seen in Fig. 4.

Fig. 4
An illustration of the drivers of greenwashing has 4 elements. Organizational drivers at the center besides market and non-market external drivers, and individual drivers like manager personality together contribute to greenwashing.

Drivers of greenwashing (own figure based on Delmas and Burbano 2011)

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First, various external market factors can lead managers to engage in greenwashing. Due to the high importance of stakeholders’ perceptions of a firm and the respective firm’s image, stakeholder preferences should shape a firm’s strategy in general (Berrone et al. 2015). Hence, managers should take into account the different preferences of consumers and investors. For example, new insights from research show that investors have also started to acknowledge the importance of ESG and might even be willing to forego parts of their return to invest into stocks with a particularly high ESG performance (Riedl and Smeets 2014). Due to the corresponding costs of integrating actual substantial ESG measures, the growing demand for this topic among different kinds of stakeholders can lead firms to simply increase their communication of such a focus without truly engaging with any ESG dimension. Similarly, if competitors are perceived to be raising their ESG commitment, this can motivate managers to act accordingly and to use greenwashing as a quick and cheap measure to match the competition.

Besides these market-related factors, institutional (non-market) forces can influence a management’s decision to misstate a firm’s ESG performance as another external driver. In this context, the possibility to monitor a firm’s related activities is a major determining factor for the decision to utilize greenwashing: If the institutional disclosure regulation grants enough leeway to either misstate an exaggerated ESG focus or to conceal potentially harmful information, a firm’s management might be more prone to take advantage of such latitude. Similarly, a lack of NGOs critically assessing related claims can increase the likelihood of greenwashing. Managers might further be more prone to engage in greenwashing in the absence of critical news about potential corporate misbehavior: If news agencies have not reported other forms of corporate misbehavior in the past, firms might perceive less of a hurdle to strategically practicing greenwashing, since, even if the greenwashing were to be unveiled, the news might not cover this topic in the future either.

Moreover, besides these external determinants, firm-specific internal drivers are also of importance. In this vein, psychological characteristics of the top management team can crucially influence strategic decision-making processes. According to upper echelons theory, a manager’s experiences and personality significantly shape the behavior within a firm and hence respective firm outcomes (Hambrick 2007). Therefore, behavioral biases and individual preferences, such as overconfidence or hubris of managers, time preferences, as well as potential striving for reputational gains, are major factors for determining a firm’s strategic ESG communication. They can hence also lead to increased greenwashing engagement. For example, more narcissistic and short-term-oriented managers should be expected to be more prone to engaging in greenwashing compared to any altruistic or long-term-oriented peers (Delmas and Burbano 2011; Petrenko et al. 2014).

Additionally, internal organizational forces can also increase the likelihood of greenwashing. If a firm shows a rather weak corporate governance structure, then misbehavior by the top management team might go undetected or unpunished. The necessity of disguising or overshadowing certain activities or news potentially stemming from previous controversial practices and the corresponding lack of honesty on the firm level is another factor that can motivate engaging in excessive ESG communication as some form of distraction. For example, in the case of recent firm-specific controversies, the respective management might be incentivized to rely on greenwashing to shift stakeholders’ focus on those topics and away from the mentioned controversial parts. Furthermore, firms might simply lack the financial resources to actively engage in CSR-specific activities or to invest accordingly, so that relying on CSR communication alone becomes the only possibility to somehow address the increasing stakeholder demand for this topic, thus further leading to potential greenwashing.

Finally, the specific drivers of greenwashing can affect each other in a similar vein, which would in turn lead to an additional indirect (moderating) impact of each driver on greenwashing. First and foremost, all external forces as well as managers’ personalities can significantly shape a firm’s organizational processes, such as its firm culture, hierarchy structure, and monitoring processes, which can then in turn influence a management’s decision about whether to engage in greenwashing or not. Furthermore, external market- and non-market-related forces often show strong interrelations: On the one hand, markets are an important factor for the decision-making process of institutional forces, especially considering the integration of new or the adaption of existing regulation. On the other hand, the outcomes of such institutional forces might shape the behavior of market participants.

To summarize: despite research pointing out a rather negative impact of greenwashing on financial performance, managers may have multiple motivations to nevertheless engage in greenwashing. Disguising other corporate activities, fulfilling external demand without bearing the costs of substantial ESG measures, managerial overconfidence, inefficient information processing, and wrong expectations are only the most prominent ones.

6 Guidelines for Avoiding Greenwashing

Now that we have described how greenwashing tends to turn out for a firm as well as assessing potential drivers of this practice, this subchapter depicts broad guidelines for how firms can prevent being accused for greenwashing. In doing so, we take the perspective of firms that do not have the intention of being misleading about their ESG efforts and performance. Given that stakeholders have become increasingly vigilant about the issue of greenwashing, unintentionally poor communication strategies can also lead to firms being accused of greenwashing. Within their report “Understanding and Preventing Greenwash: A Business Guide,” BSR provides a comprehensive step-by-step framework which presents a checklist consisting of 14 questions to help firms to avoid inadvertently engaging in greenwashing, divided into the three categories “impact,” “alignment,” and “communication” (Horiuchi et al. 2009).

First, “impact” refers to the content of statements and proposes that firms should check every piece of information that they state for its relevance, its correctness, and its usefulness before they disclose it. Therefore, companies should only publish statements if they believe the content is compelling and adds value for stakeholders. Moreover, in this case, companies should ensure that they have put sufficient (financial and HR) resources into verifying the underlying facts and sources and that they therefore do not disclose misinformation. Otherwise, unfitting information, especially if it could be perceived as unreasonable given a certain firm’s background, or false/unverified claims might cause consumer confusion. This confusion can in turn lead to customers refraining from buying products or services from the firm. If parts or sub-goals of the claims have already been achieved, this information should also be communicated.

Next, once a company has assured itself of the adequacy and correctness of the information, it must further ensure that other corporate activities are in line with the quintessence of these statements. In order to do this, there must be consistency across all divisions on the issue in question. It should also be checked in advance whether other products, services, or activities of the company are consistent with the respective claims and that they are neither contradictory nor ambiguous, which might otherwise lead to potential confusion and controversies. To increase the credibility of the communicated information, firms should further strive for support via third-party rankings, labels, or certification to strengthen the trust among their stakeholders.

Finally, the way in which statements are communicated is of crucial relevance as well. It is important that all information is presented clearly and understandably for the average consumers of the respective target group, without embellishing statements with potential technical terms or any form of self-glorification. This further strengthens the trustworthiness of the respective firm’s communication in general, which is another major factor in this regard. Additionally, if applicable, firms should consider using data or other sources to prove the correctness of their claims (Horiuchi et al. 2009).

In short, both transparency and the ability to verify data are crucial for avoiding greenwashing. As long as stakeholders do not have any possibility to validate the environmental performance of each individual part of the supply chain, firms have the leeway to hide controverse parts. Yet, current trends—especially regarding the development of digital innovations—have at least begun to counteract such problems. In this vein, firms have started to integrate the blockchain technology to better track every section of their supply chains (Hastig and Sodhi 2019). Generally speaking, a blockchain can be described as a decentralized, growing, and expandable collection of individual datasets, which are all linked together through cryptographic hashes that combine each data block and prevent manipulation of the whole blockchain. While so far, blockchains have been primarily known for their usage in cryptocurrency networks, firms have acknowledged their usefulness in other parts of their operating procedures. In the context of supply chain traceability, a blockchain can thus create a chronological and tamper-proof database which covers all necessary information about every party in a firm’s supply chain. Because of the inability to ex-post manipulate existing data packets on a blockchain, firms can ensure that no party within the supply chain fakes their respective entry. This limits the ability to engage in greenwashing through the concealing of non-complying suppliers (Global Reporting Initiative 2019). However, since technologies like these with the target of decreasing information asymmetry are only at their outset, the problem of greenwashing within a firm’s supply chain will remain, overall, an ongoing issue in the near future.

7 Conclusion

Both scholars and practitioners have successfully developed specific guidelines for avoiding greenwashing. Nevertheless, there will continue to be firms that communicate the impression that they are acting more ecologically and socially responsible than they really are. However, much has changed in the sustainability discourse and in ESG reporting procedures since the 1990s. The emergence of ESG has triggered a new momentum in the transitioning of economic behavior toward environmental protection. In the same vein, the concept of sustainability has contributed to a greening of the (global) economy (Graf 2019).

That being said, there is still room for improvement. In particular, transparency regarding a firm’s ESG engagement is to date still inadequate, leading to informational asymmetries between firms and their respective stakeholders. While current regulations are trying to tackle this problem, the impact of those institutional actions on this issue is limited, implying an open challenge. For example, the EU taxonomy and disclosure regulations oblige certain participants on the capital markets to publish mandatory statements regarding both their firm-specific ESG performance and the alignment of their capital market products with the respective standards of the EU taxonomy. However, as this procedure is still only restricted to firms within the EU financial services industry, the majority of global firms are still not bound to any form of mandatory ESG disclosure of (auditable) reports. Therefore, to date, firms still have the leeway to exploit such asymmetric information, which results in an ongoing problem of potential greenwashing, an issue which stakeholders must be aware of.