Does greenwashing affect Company's stock Price? Evidence from Europe

The purpose of this paper is two-fold: (1) investigate on the existence of market reactions to greenwashing announcements in Europe and (2) analyse whether corporate environmental performance measured by ESG ratings does play a role in differentiating market reactions once greenwashing news have been published. We use as reference The Corporate Climate Responsibility Monitor 2022 to identify greenwashing companies in Europe and adopt Refinitiv ESG ratings to calculate corporate environmental performance scores of companies. Using a sample of European firms from different sectors, our results demonstrate that greenwashing announcements do not significantly affect cumulative abnormal returns (CAR) of companies in the days after the release of the news. In addition, corporate environmental performance (CEP) as measured by ESG ratings is significantly negatively related with CAR after the exposure of greenwashing companies. Our findings have implications for policymakers and investors. Indeed, on the one hand, we show that the market alone cannot identify and penalize companies that commit greenwashing practices, thus a strong intervention from governmental authorities is crucial if Europe wants to keep its promise of reaching Climate Neutrality by 2050. On the other hand, we demonstrate that, as of today, ESG ratings do not provide a holistic representation of corporate environmental performance and, as a consequence, they end up misdirecting sustainable investments to firms that, in fact, have a poor environmental commitment.