Corporate Greenwashing, Environmental Disclosure Regulation, and Cost of Bank Loans: International Evidence

Abstract

A primary objective of mandatory corporate environmental disclosure rules is to provide investors with material information on firms’ environmental performance and ensure corporate accountability for any environmental wrongdoings. However, corporate greenwashing, in which firms disseminate relatively benign environmental impacts while concealing more environmentally damaging ones, can severely compromise this objective. To investigate this issue, the first empirical study examines how the staggered introduction of corporate environmental disclosure mandates affects corporate greenwashing engagement worldwide . The primary finding shows that affected firms by these mandates significantly reduced their greenwashing by genuinely improving their overall environmental practices. This reduction is more pronounced among larger firms, those with greater analysts’ coverage, those less financially constrained, and affected firms in countries with greater environmental awareness norms. Further analysis reveals that through the green commitment channel, affected firms boosted green investments, implemented environmental reduction initiatives and adjusted operations, leading to a greenwashing reduction. Subsequently, affected firms experienced reduced financial performance. These findings highlight the effectiveness of environmental disclosure mandates in promoting substantive and transparent corporate environmental practices and disclosures and their negative consequences on corporate financial performance. The second empirical study argues that greenwashing borrowers, who selectively disseminate only favourable environmental information while withholding information on the most environmentally damaging actions, expose banks to higher informational and credit risks. Therefore, banks will likely charge greenwashing borrowers higher loan rates on their lent loans to compensate for enduring these two risks. To test this argument, this study uses data from 38 countries between 2005 and 2019 to examine the impact of firm-level greenwashing on bank loan costs. The findings show that banks charged higher rates to corporate greenwashers, but this effect is found only after the enforcement of the Paris Agreement in 2016. Further, this effect is more pronounced in countries with higher climate vulnerability, fewer Environmental Non-Governmental Organizations (ENGOs), and among borrowing firms with fewer analysts following them. Overall, the results highlight the negative impacts of corporate greenwashing engagement on corporate borrowing costs.