European regulator finds there’s no financial price for green scandals

Securities regulators have become increasingly worried about greenwashing, yet new research from the European Securities and Markets Authority (ESMA) finds that companies that get caught greenwashing don’t pay any kind of financial price for their misconduct.

In a new paper, which examines the financial impact of greenwashing controversies — defined as companies facing allegations that their environmental behaviour doesn’t match their public commitments — the regulators find that companies aren’t punished by the market when these issues arise.

Specifically, the researchers find “no systematic evidence of a relationship between” the market valuations or equity returns at companies facing greenwashing scandals.

“Overall, our findings suggest that investors and markets did not pay close attention to greenwashing-related controversies in 2020 and 2021,” the researchers said.

“The results suggest that greenwashing allegations did not have a clear financial impact on firms and highlight the absence of an effective market-based mechanism to help prevent potential greenwashing behaviour,” the paper added.

While there don’t appear to be any financial consequences for engaging in greenwashing, the paper said that the practice poses risks to both investor confidence and efforts to curb greenhouse gas emissions in order to combat climate change.

“The transition to a low-carbon economy requires trust in the commitment and ability of companies to adapt their business operations to help deliver climate-related objectives. However, greenwashing risks undermining this trust by sapping consumer and investor confidence, underlining the importance of monitoring and tackling the problem,” it said.

The researchers also found that the frequency of greenwashing controversies has been on the rise in recent years, and that they have been concentrated in three sectors — the oil and gas sector, the financial industry, and the food and beverage business.

“A growing greenwashing-related news flow involving financial sector firms warrants monitoring to ensure that public trust in the ability and willingness of the financial sector to finance the low-carbon transition remains,” the report said.

According to the researchers, the lack of a market discipline mechanism “underscores the importance of clear policy guidance by regulators and efforts by supervisors to ensure the credibility of sustainability-related claims.”