What you see is not what you get: ESG scores and greenwashing risk

This paper shows that ESG scores capture a company’s greenwashing behavior. Greenwashing accusations are most prevalent among large companies with high ESG scores. We empirically employ a novel theoretical model that distinguishes between the communication of a company’s environmental efforts (apparent environmental performance) and its actual environmental impact (real environmental performance). The correlation of the apparent (real) environmental performance with ESG scores is significantly positive (negative). Therefore, ESG scores are unsuitable for measuring real environmental impact. Thus, investors focusing on high ESG-rated companies may unknowingly increase their greenwashing risk exposure, and academics may use misleading information to assess greenwashing risk. • 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.