Does Financial Performance Shield Greenwashers? Evidence from European Firms

This is the authors' abstract. We don't add key points for this paper.

This paper attempts to examine the impact of greenwashing on firms’ risk and the shielding effect of financial performance across different sustainability conditions. Using a sample of 457 non-financial firms from European countries and a two-step generalized method of moments (GMM) model, this study assesses the moderating role of financial performance in the relationship between greenwashing and firm risk. In this study, we use both total risk and market risk to measure firms’ risk. To address construct validity, we operationalize greenwashing as the industry-adjusted abnormal gap between a firm's self-reported envi-ronmental, social, and governance (ESG) score and its controversy-adjusted ESG combined score, thereby capturing intentional ESG decoupling. We have documented that green-washing increases firms’ risk when sustainability conditions are not enough developed. Furthermore, our results reveal that financial performance effectively mitigates the adverse impact of greenwashing on firm risk primarily under transitioning (medium) sustainability conditions. Overall, our findings indicate that the risk effects of greenwashing are context-dependent across different sustainability development levels.