Why Do Firms Greenwash?

Abstract

With the development of green consumption and environmental, social and governance (ESG) investment, greenwashing - the act of presenting an exaggerated environmentally friendly image - has also been spreading. Economically, in this paper, greenwashing is viewed as a market failure caused by information asymmetry and a cost-benefit trade-off rather than a moral problem. Based on recent empirical research and corporate cases and regulatory developments in the European Union, the United Kingdom, and the United States, this paper will analyze the incentives that make greenwashing attractive at the firm, market, and institutional levels, and trace its consequences across micro-, meso- and macro-dimensions, including financial penalties, brand devaluation, distorted competition, misallocation of green capital, and weakened environmental innovation. Next, the paper examines cross-border regulatory systems such as the EU's Empowering Consumers for the Green Transition Directive, the UK's Digital Markets, Competition and Consumers Act, and the US Federal Trade Commission's Green Guides, as well as their structural deficiencies, including regulatory arbitrage, fragmented certification, and high evidentiary burdens for consumers. Finally, an all-encompassing governance model has been proposed to combine mandatory disclosure with tiered penalties; a transparent environmental information infrastructure would be established, stakeholder oversight and positive incentives for verified green transformation would be introduced, and thus, corporate profit motives would be in line with the objective of sustainable development.