Greenwashing is a legitimation firm strategy that responds to the increasing demand for environmental engagement. In this study, we examined its impact on firms' financial soundness from creditor and investor viewpoints, exploring the interplay between sustainability spin and economic resilience, and considering the moderating role of "Board Environmental Orientation". Using a sample of 1,276 listed European firms over 2002–2022, we showed that high levels of greenwashing worsen firms' financial soundness by increasing the cost of debt and the credit risk. However, firms with highly environmentally-oriented boards may be perceived as more reliable and more likely to implement effective environmental practices, mitigating the negative effect of greenwashing on their financial soundness. Our findings underscored the financial advantages of proactive environmental management and revealed how credible sustainability governance structures, particularly at the board level, can buffer against reputational and financial risks associated with greenwashing. By highlighting this moderating role, we contribute to a better understanding of how firms can maintain financial resilience while navigating increasingly demanding sustainability expectations. The validity of results is supported by several robustness tests: We performed linear regressions with instrumental variables and incorporate a range of well-established, theoretically grounded indicators of credit risk.
Citation: Paula Castro, Cristina Gutiérrez-López, Juan Guerrero-Calderón, Borja Amor-Tapia. Behind the green mirage: Financial damages of greenwashing and the role of board environmental orientation[J]. Green Finance, 2025, 7(4): 717-747. doi: 10.3934/GF.2025027
Greenwashing is a legitimation firm strategy that responds to the increasing demand for environmental engagement. In this study, we examined its impact on firms' financial soundness from creditor and investor viewpoints, exploring the interplay between sustainability spin and economic resilience, and considering the moderating role of "Board Environmental Orientation". Using a sample of 1,276 listed European firms over 2002–2022, we showed that high levels of greenwashing worsen firms' financial soundness by increasing the cost of debt and the credit risk. However, firms with highly environmentally-oriented boards may be perceived as more reliable and more likely to implement effective environmental practices, mitigating the negative effect of greenwashing on their financial soundness. Our findings underscored the financial advantages of proactive environmental management and revealed how credible sustainability governance structures, particularly at the board level, can buffer against reputational and financial risks associated with greenwashing. By highlighting this moderating role, we contribute to a better understanding of how firms can maintain financial resilience while navigating increasingly demanding sustainability expectations. The validity of results is supported by several robustness tests: We performed linear regressions with instrumental variables and incorporate a range of well-established, theoretically grounded indicators of credit risk.
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