Firms are under increasing pressure to disclose their environmental performance, resulting in some exaggerating their results and others underreporting them. At one end of the spectrum is “greenwashing”: firms exaggerate or fake eco-friendliness to influence stakeholder perceptions, conceal bad business practices, lower exposure risk, or alleviate competitive pressure. Examples include Volkswagen’s falsification of vehicle emissions data, Coca-Cola advertising its PlantBottle, and Innisfree labeling a plastic bottle wrapped in paper a “paper bottle.” These examples suggest that firms often use greenwashing as a substitute for real change and innovation.
“Brownwashing” is at the other end of the spectrum: firms hide or downplay their environmental achievements. These firms may be reluctant to state their true environmental performance, fearing backlash from anti-sustainability activists. For example, last year, several major banks and financial firms told Bloomberg they were burying ESG (environmental, social, and governance) in their reports and “quietly recalibrating how they talk about ESG investing in the US, navigating around potential political fights in order to avoid losing lucrative business.” Often, these firms do not just underrepresent their current performance, they lose interest in innovating further.
In between these extremes are “green-highlighting” firms that find the right balance between improving their environmental performance and communicating their actions. For example, firms that perceive significant reputational risks if they are accused of greenwashing have a strong incentive to meet their environmental commitments and maintain legitimacy.
This Advisor examines the relationship between corporate environmental disclosure (CED) and environmental innovation (known as “ecovation”). It suggests that firms avoid greenwashing and brownwashing, as both are associated with lower innovation than green-highlighting strategies.
Why Disclose Environmental Performance?
CED has both direct benefits (e.g., reduced litigation costs, fines, and tax concessions) and indirect ones (e.g., green signals that help differentiate a firm in the crowded marketplace). Similarly, CED comes with explicit costs (expenses paid for writing reports and green marketing) and implicit ones (such as alienating some targeted consumers).
There are more subtle implications for firm performance. For example, consumers can usually differentiate between authentic and fake green performance, which can lead to changing consumer attitudes toward a firm’s products resulting in revenue decline. This may lead to capital withdrawal by investors, reduced public trust, decreased brand value, and/or increased compliance costs from stepped-up regulatory scrutiny.
Consumers and markets will notice the dissonance between messaging and action at some point. Therefore, although small levels of greenwashing can create initial gains, once this behavior crosses a certain threshold such that symbolic disclosures exceed substantive ones, it leads to reduced consumer trust and a period of prolonged underperformance.
CED & Innovation
The relationship between environmental disclosure and environmental innovation (ecovation) is more complex. At one extreme are brownwashing firms, which choose not to disclose their true environmental efforts. As these firms are likely either content with their performance or hesitant to acknowledge it (fearing backlash from key constituents), they are unlikely to exhibit a significant appetite for further ecovation, despite their past positive performance.
At the other end of the spectrum are greenwashing firms. We know that greenwashing is often used to demonstrate false environmental commitments as a way to maintain social legitimacy, but we do not yet understand its impact on firm reputation, stakeholder perceptions, or long-term performance (research has found evidence of both negative and positive effects).
Some research suggests that reputational concerns and risks cause greenwashing firms to eventually graduate from greenwashing to “real” greening. That is, some firms are pushed into innovation to ward off stakeholder pressure, loss of credibility, and reputational risks. For these firms, environmental disclosure that starts as a symbolic action may eventually create meaningful pressure that nudges the firm toward ecovation. My research suggests this is more likely to be the case for firms known as “green highlighters,” whose leaders know how to balance substantive and symbolic greening actions.
[For more from the author on this topic, see: “Do Corporate Environmental Disclosures Lead to Innovation?”]
