Financial Impact of Greenwashing Controversies
The European Securities and Markets Authority (ESMA) releases a report on the financial impact of greenwashing controversies, aiming to analyze the impact of greenwashing controversies on corporate stock prices and valuations.
ESMA believes that greenwashing controversies will undermine consumer and investor confidence and have a negative impact on company reputations. As companies continue to make commitments to improve environmental and social performance in the development of a low-carbon economy, the emergence of greenwashing controversies is increasing. Stakeholders want to know whether companies’ sustainability goals and commitments are reflected in their actions.
Related Post: International Capital Market Association Releases Greenwashing Report on Sustainable Finance
How to Spot Greenwashing Controversies
ESMA draws on the definition provided by European Supervisory Authorities (ESAs) about greenwashing: Greenwashing refers to statements and actions related to sustainable development that do not clearly and fairly reflect the sustainable practices of entities, financial products, or financial products. These actions may mislead consumers, investors, or other market participants. Therefore, the EU requires ESA to monitor greenwashing and its potential impacts.
ESMA sets the research scope on the STOXX Europe 600 Index constituents from January 2020 to December 2021, and 933 controversial events are obtained from the RepRisk database. ESMA first searches for all events containing “greenwashing” and uses manual marking to determine whether the events meet ESA’s definition of greenwashing.
Trends in Greenwashing Controversies
ESMA finds that of the 933 controversies, 68% are related to greenwashing controversies, of which “greenwashing” appears 257 times (28%). The remaining greenwashing controversies came from manual flagging. ESMA found that regardless of the approach, the number of greenwashing controversies increased over time, with their average monthly frequency growing from 10 to 30.
Regarding the categories involved in greenwashing controversies, 50% only involve the environmental aspect, 18% only involve the social aspect, and the remaining 32% are related to both environmental and social aspects. A typical greenwashing controversy arises when companies issue carbon reduction claims but still increase greenhouse gas emissions. In terms of industries involved in greenwashing controversies, the fossil energy industry, the financial industry, and the food industry accounted for more than half of all controversies, and the same company often became the protagonist of multiple greenwashing controversies.
Financial Impact of Greenwashing Controversies on Enterprises
Regulators are very concerned about whether corporate greenwashing controversies will have financial impacts, and these greenwashing controversies may bring reputational risks and litigation risks to companies. ESMA believes that if the return rate of a company involved in a greenwashing controversy deviate from the expected rate of return, it indicates that the greenwashing controversies may create financial risks. Cumulative Abnormal Returns (CAR) can measure the deviation of stock price returns. ESMA’s t-test shows that CAR is not statistically significant, and the view that greenwashing controversies have an impact on corporate stock prices is not valid.
In addition to the impact on stock prices, ESMA also studies whether the greenwashing controversies will affect valuations. If the greenwashing controversies has a negative impact on corporate valuation, it may cause the company’s price-to-earnings ratio (PE) to decline relative to similar companies. However, ESMA did not find the impact of the greenwashing controversies on P/E ratios to be statistically significant. When forward PE ratio is used, no statistical relationship between forward PE ratio and greenwashing controversies can be found.
ESMA believes that although most investors believe that greenwashing can affect corporate share prices and valuations, empirical research shows that investors do not pay close attention to these controversies. Despite this, the identification and monitoring of greenwashing controversies are still the focus of regulatory agencies, and the market still needs to establish effective mechanisms to ensure the credibility of sustainable development claims.
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