Robert H. Smith School of Business, University of Maryland, USA

Greenwashing: A Prinicipal-Agent Perspective

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Abstract

Investors and CEOs publicly state that they are improving the ESG outcomes of the companies they own and manage. However, measuring ESG outcomes, and thus verifying these claims, is difficult due to greenwashing, that is, presenting a deceptively positive impression of a firms’ ESG outcomes. I develop a principal-agent based model and theorize as to when the ESG preferences of top management and investors drive firms to greenwash. I show ESG preferences affect greenwashing empirically in a sample of large U.S. public firms. I find that management’s ESG preferences, as proxied by the language they use in earnings calls, correlates with both ESG policies and ESG outcomes. Investor ESG preferences, as proxied by sustainable funds, correlate with ESG policies and not ESG outcomes. These results are consistent with the model and suggest that some managers greenwash in response to pressure from investors with high ESG.

Biography

Investors and CEOs publicly state that they are improving the ESG outcomes of the companies they own and manage. However, measuring ESG outcomes, and thus verifying these claims, is difficult due to greenwashing, that is, presenting a deceptively positive impression of a firms’ ESG outcomes. I develop a principal-agent based model and theorize as to when the ESG preferences of top management and investors drive firms to greenwash. I show ESG preferences affect greenwashing empirically in a sample of large U.S. public firms. I find that management’s ESG preferences, as proxied by the language they use in earnings calls, correlates with both ESG policies and ESG outcomes. Investor ESG preferences, as proxied by sustainable funds, correlate with ESG policies and not ESG outcomes. These results are consistent with the model and suggest that some managers greenwash in response to pressure from investors with high ESG.