Key Messages:

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• ESG scores are positively correlated with greenwashing cases.

• ESG scores mainly measure the apparent rather than
  the real environmental performance.

• Higher analyst coverage limits the exaggeration of
  apparent environmental performance.

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(Corresponding author)

The study analysed the relationship between actual greenwashing allegations and ESG ratings for the STOXX Europe 600 constituents. Greenwashing allegations are most common among large companies with high ESG scores. This is because ESG scores predominantly reflect the communication of a company's environmental efforts (apparent environmental performance) rather than its actual environmental impact (real environmental performance). Therefore, ESG scores are unsuitable for measuring the actual environmental impact. Investors who focus on companies with high ESG ratings could thus unwittingly increase their risk of greenwashing. Academics also run the risk of using misleading information for greenwashing risk assessments.
The article shows how ESG ratings can capture a company's greenwashing behaviour. The authors empirically apply a novel theoretical model that can distinguish between the communication of a company's environmental efforts (apparent environmental performance) and its actual environmental impact (real environmental performance). The correlation of apparent (real) environmental performance with ESG ratings is significantly positive (negative).

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Citation:

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Kathan, M. C., Utz, S., Dorfleitner, G., Eckberg, J. und Chmel, L. (2025): What you see is not what you get: ESG scores and greenwashing risk. Finance Research Letters 74, 106710.

DOI PDF

Related articles:

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Dorfleitner, G. und Utz, S. (2023): Green, green, it’s green they say: a conceptual framework for measuring greenwashing on firm level. Review of Managerial Science, 10.1007/s11846-023-00718-w.

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Liu, Y., ?Zhang, J. und Dai, Y. (2023): Analyst following and greenwashing decision. Finance Research Letters 58, 104510.

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The authors conclude that ESG scores are not reliable for measuring actual environmental impact. The call for a more nuanced approach to assessing greenwashing in science is emphasised. It also confirms the finding that a high number of analysts monitoring a company can reduce the difference between the apparent and actual environmental performance of a company (Liu et al., 2023). In particular, for CO₂-intensive companies, such as the fossil fuel industry (coal, oil, gas), the chemical industry, heavy industry (e.g. steel production) and the cement industry, detailed reporting by analysts leads to a reduction in the risk of greenwashing.

ESG:

Environmental, Social and Corporate Governance (ESG) are criteria and frameworks of the United Nations (UN) and financial institutions for the consideration of environmental, sustainability and social issues within corporate management.?
The ESG criteria state that in addition to the interests and needs of companies, the needs of all employees, customers, suppliers, financial institutions, non-governmental organisations, social and environmental representatives should also be taken into account.

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ESG comprises three key areas that are assessed when analysing a company's sustainability performance:

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Environment (E)

This aspect refers to a company's impact on the environment, including issues such as climate change, energy efficiency, resource consumption, waste management and pollution. Companies that focus on environmentally friendly practices and minimise their environmental impact are rated positively in the ESG rating.?

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Social (S)

The social aspect of ESG relates to a company's relationships with its employees, customers, suppliers, communities and other relevant stakeholders. This includes issues such as labour conditions, human rights, diversity and inclusion, health and safety in the workplace and community engagement. Companies that act in a socially responsible manner and take care of the well-being of their stakeholders receive positive ratings.

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