How greenwashing creates a false sense of stability for companies

The paper, titled ‘False Stability? How Greenwashing Shapes Firm Risk in the Short and Long Run’, is published in the peer-reviewed Journal of Risk and Financial Management. 

Environmental Social Governance (ESG) scores have become an important measure for investors when assessing risk. 

“However, ESG scores do not always reflect a firm’s true environmental performance,” says Tanvir Bhuiyan, an associate lecturer at the Murdoch Business School, noting that there is often greenwashing – the gap between what firms claim about their environmental performance and how they actually perform. 

“In simple terms, it is when companies talk green but do not act green,” Bhuiyan explains. “Firms do this to gain reputational benefits, attract investors, and appear lower-risk and more responsible – without necessarily reducing their carbon footprint.” 

Understanding the risks of greenwashing 

The Murdoch study examined Australian companies from 2014 to 2023 to understand how greenwashing affects financial risk and stability. 

To measure whether companies were exaggerating their sustainability performance, researchers created a comprehensive quantitative framework to measure greenwashing by directly comparing ESG scores with carbon emissions, allowing researchers to identify when sustainability claims were inflated. 

They then analysed how greenwashing affected a company’s stability by looking at its volatility in the stock market. 

According to Bhuiyan, the key finding from the research is that greenwashing enhances firms’ stability initially, but that effect fades away over time. 

“In the short term, firms that exaggerate their ESG credentials appear less risky in the market, as investors interpret strong ESG signals as a sign of safety,” he states. 

“However, this benefit fades over time. When discrepancies between ESG claims and actual emissions become clearer, the market corrects its earlier optimism, and the stabilising effect of greenwashing weakens.” 

Regulatory pressure is beginning to curb greenwashing 

Dr Ariful Hoque, who also worked on the study, says researchers also found that greenwashing was a persistent trend for Australian firms from 2014 to 2022. 

“On average, firms consistently reported ESG scores that were higher than what their actual carbon emissions would justify,” Hoque notes. 

However, in 2023, there was a noticeable decline in greenwashing, “likely reflecting stronger Australian Securities and Investments Commission enforcement, [a] mandatory climate-risk disclosures policy starting from 2025, and greater investor scrutiny”. 

This implies that regulatory pressure is beginning to curb inflated ESG reporting, Hoque believes. 

“For companies, this research indicates that greenwashing may buy short-term credibility, but genuine emissions reduction and transparent reporting are far more effective for managing long-term risk.” 

You can find out more about the study here.