Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE AND INVESTMENT DISSERTATION ON IMPACT OF GREENWASHING ON FIRM VALUE TA THI THUY LINH ID No: 23081339 Intake 7 Supervisor: Associate Prof. Tran Thi Xuan Anh September, 2024 DISSERTATION CONFIRMATION PAGE Student’s name: Ta Thi Thuy Linh Student number: 23081339 Supervisor’s name: Associate Prof. Tran Thi Xuan Anh I, Associate Prof. Tran Thi Xuan Anh, hereby confirm that I have supervised the research and preparation of the student’s dissertation.
I have reviewed the content, structure, and methodology used in the Dissertation and found it to be of satisfactory quality. I am confident that the Dissertation meets the requirements set forth by the University of the West of England and is ready for examination. Signature of Student and date Signature of Supervisor and date Ta Thi Thuy Linh Tran Thi Xuan Anh Date: 09/09/2024 Date: 09/09/2024 ABSTRACT In recent years, environmental, social and governance (ESG) criteria have become increasingly important factors for investors when assessing a firm’s sustainability and ethical practices. As ESG investing gains momentum, the rise of greenwashing, in which companies exaggerate or falsely claim environmentally friendly practices, poses a significant challenge.
Greenwashing undermines trust in ESG initiatives and could result in reputational damage and financial deterioration for companies. With the intention of investigating the influence of greenwashing on firm value, we undertook a study which encompassed several notable companies accused of greenwashing around the world. By analyzing stock price reactions to greenwashing allegations, the study seeks to determine whether these events impact abnormal returns and cumulative abnormal returns. Our findings contribute to the broader discourse on ESG integrity and offer valuable insights into the risks firms face when exposing greenwashing.
The study highlights the financial consequences of greenwashing in the global market and adds to the literature on the intersection of ESG and corporate financial performance. 2 ACKNOWLEDGEMENTS This thesis and the research behind it would not have been possible without the exceptional support of my supervisor, Associate Prof, Dr. Tran Thi Xuan Anh. Her knowledge, orientation, insightful feedback and encouragement have been an inspiration and aided me in conducting research and completing the thesis.
I want to express my gratitude to the lecturers of the Master of Science in Finance and Investment program, Ms. Dang Thao – the program manager, as well as those involved in Banking Academy of Vietnam. Their invaluable knowledge and dedicated support provide me with a foundation to conduct this thesis. I greatly appreciate the assistance, encouragement and compassion of my UWE 7B classmates.
Not only did they accompany me in my academic study, but they also shared the invaluable information related to the thesis and stood by my side over the period of research. Their motivation has inspired me to implement this thesis. Finally, I would like to thank my family, whose love and support are with me in whatever I pursue. 3 Table of Contents DISSERTATION CONFIRMATION PAGE.
10 Chapter 1: Literature Review. Definition of greenwashing. Characteristics of greenwashing. Definition of firm value.
Drivers of firm value. Firm valuation methods. Impact of greenwashing on firm value. Research gap and proposed research frameworks.
30 Chapter 2: Methodology, data and hypotheses. Identify the event. Select event window(s). Choose estimation window.
Estimate normal returns. Estimate abnormal returns. Assess the abnormal return through statistic testing. 41 Chapter 3: Empirical results and discussion.
Overview of investigated greenwashing companies. DWS Group GmbH & Co KgaA (DWSG). In event window [-10, +10]. In event window [-5, +5].
In the event window [-3, +3]. In event window [-1, +1]. Summary of results. DWS Group GmbH & Co KgaA (DWSG).
85 5 List of Figures Figure 1. The number of entities with at least one ESG risk incident linked to environmental footprint and Misleading communication 2018-2022. Firm classification based on Environmental Performance and Communication (Delmas, 2011). Event study timeline (MacKinley, 1997).
AAR and CAAR in event window [-10, +10] (%). AAR and CAAR in event window [-5, +5] (%). AAR and CAAR in event window [-3, +3] (%). AAR and CAAR in event window [-1, +1] (%).
VOWG’s stock price, AR and CAR trend in the window [-10, +10]. DWS’s stock price, AR and CAR trend in the window [-10, +10]. KSS’s stock price, AR and CAR trend in the window [-10, +10]. WMT’s stock price, AR and CAR trend in the window [-10, +10].
ENI’s stock price, AR and CAR trend in the window [-10, +10]. 78 6 List of Tables Table 1. Identify events related to greenwashing announcements. Event windows for each event.
Estimation windows for each event. Data of each company need to be collected. AAR and CAAR in event window [-10, +10]. AAR and CAAR in event window [-5, +5].
AAR and CAAR in event window [-3, +3]. AAR and CAAR in event window [-1, +1]. Summary of results from tests on hypotheses (at 5% significant level). Volkswagen’s AR, CAR and T-test in event window [-10, +10].
Volkswagen’s AR, CAR and T-test in event window [-5, +5]. Volkswagen’s AR, CAR and T-test in event window [-3, +3]. Volkswagen’s AR, CAR and T-test in event window [-1, +1]. DWS’s AR, CAR and T-test in event window [-10, +10].
DWS’s AR, CAR and T-test in event window [-5, +5]. DWS’s AR, CAR and T-test in event window [-3, +3]. DWS’s AR, CAR and T-test in event window [-1, +1]. KSS’s AR, CAR and T-test in event window [-10, +10].
KSS’s AR, CAR and T-test in event window [-5, +5]. KSS’s AR, CAR and T-test in event window [-3, +3]. KSS’s AR, CAR and T-test in event window [-1, +1]. WMT’s AR, CAR and T-test in event window [-10, +10] .WMT’s AR, CAR and T-test in event window [-5, +5].
WMT’s AR, CAR and T-test in event window [-3, +3]. WMT’s AR, CAR and T-test in event window [-1, +1]. ENI’s AR, CAR and T-test in event window [-10, +10]. ENI’s AR, CAR and T-test in event window [-5, +5].
ENI’s AR, CAR and T-test in event window [-3, +3]. ENI’s AR, CAR and T-test in event window [-1, +1]. Research interest Environmental, Social, and Governance (ESG) originated from Corporate Social Responsibility (CSR) in the early 20s and previously Environment, Health, and Safety (EHS) in the 1980s and the Sustainable Enterprise Movement in the 1990s. ESG has developed into a comprehensive framework encompassing essential aspects related to environment and social impacts and corporate governance frameworks.
ESG disclosure has rapidly grown over the last two decades as the number of firms providing information related to environmental and social disclosures has significantly risen. Due to the sustainability issues having become global and pivotal to success, companies are recently joining their strategic networks to tackle ESG issues such as climate change, greenhouse gas emissions, etc. With the rise of sustainability reporting and the complexity of the reporting measures, the transparency and reliability of this information became a major issue among relevant stakeholders. Firms use reports such as annual reports, sustainability reports, or company websites to disclose ESG information including frameworks and measures.
This inconsistency of reporting creates potential misleading disclosures, including a wide range of actions that exaggerate and mispresent “green” credentials called “greenwashing”. In the absence of consistent international standards for ESG-related taxonomies, especially concerning environmental criteria, the prevalence of greenwashing has risen. Consequently, the number of entities implicated in greenwashing practices has increased 8 over recent years. Figure 1 illustrates the trend in recorded greenwashing incidents from 2018 to 2022.
The number of entities with at least one ESG risk incident linked to environmental footprint and Misleading communication 2018-2022.com Greenwashing, a term coined in 1986, refers to the practice where companies deceptively promote their products or policies as environmentally friendly (Romero, 2008). Research into greenwashing has gained traction as consumers and regulators become more environmentally conscious. Initial studies focused on identifying greenwashing tactics, such as misleading labels, vague claims, and false advertising. Over time, the scope expanded to analyze the impact of greenwashing on consumer trust, corporate reputation, and market behavior.
Greenwashing poses significant challenges to stakeholders who rely on transparent information to make informed decisions. It undermines genuine sustainability efforts and erodes trust in businesses, potentially leading to negative repercussions for companies' market value. As the market continues 9 to evolve, understanding the impact of greenwashing on a company's value becomes crucial. While there is considerable research on corporate sustainability and environmental responsibility, the specific effects of greenwashing on firm value remain underexplored.
Companies may engage in greenwashing to reap short-term benefits, such as increased sales or improved public perception. However, the potential long-term consequences, including reputational damage, legal ramifications, and loss of consumer trust, can adversely affect a company's market value. This dissertation seeks to fill this gap by investigating the firm value implications of greenwashing. Research objectives The primary objective of this study is to assess the impact of greenwashing on the value of companies.
To achieve this, the research aims to: (1) Identify and investigate drivers of greenwashing. (2) Evaluate the effect of greenwashing on firm value. (3) Provide recommendations for companies and policymakers as well as stakeholders to mitigate the negative effects of greenwashing. Research questions To guide the investigation, the following research questions are proposed: What is the impact of greenwashing on firm value? 4.
Research structure The dissertation is structured as follows: 10 Chapter 1: Literature Review - This chapter reviews existing literature on greenwashing, firm value, and related concepts, providing a theoretical framework for the study. Chapter 2: Methodology, data and hypotheses - This chapter outlines the methodology, data collection, and hypotheses used to investigate research questions. Chapter 3: Empirical results and discussion - This chapter presents results of investigation and discussion of limitation and future research. Chapter 4: Conclusion - This chapter summarizes the key findings, highlights the contributions of the research, and offers recommendations for future research and practice.
11 Chapter 1: Literature Review 1. Definition of greenwashing Greenwashing indicates a term blending "green" and "whitewashing", referring to a deceptive marketing practice where a company or organization exaggerates or fabricates its environmental efforts or benefits of its products to appear more environmentally friendly than it really is. This practice can mislead consumers, investors, and stakeholders who prioritize sustainability and ecological responsibility in their decisions (Mathew, 2021). Firm classification based on Environmental Performance and Communication (Delmas, 2011) As can be seen from the figure, a greenwashing firm engages in two behaviors simultaneously: poor environmental performance combined with positive communication about environmental performance.
Firms can be bucketed into bad environmental performers (called “brown” firms) or good environmental performers 12 (called “green” firms). Each type of firm can choose positive or no communication about their environmental performance. For more details, poor-environmental-performance firms can choose either remain silent about their bad environmental performance (Silent Brown Firms – Quadrant III) or try to represent their poor environmental performance in a positive light (Greenwashing Firms – Quadrant I). With good environmental performers, they can choose a positive communication about their environmental performance (Vocal Green Firms – Quadrant II) or no communication about their environmental performance (Silent Green Firms) – Quadrant IV) (Delmas, 2011).
Characteristics of greenwashing 1. False or unsubstantiated claims Companies often engage in greenwashing by making environmental claims that lack credible evidence or scientific backing. These claims mislead customers into believing that the product or practice is more environmentally friendly than it truly is, thus capitalizing on the growing demand for sustainable products without contributing to environmental sustainability. This deceptive practice undermines trust and can have long – term negative effects on a firm’s reputation (Delmas, 2011).
Meanwhile, Parguel et al. (2011) discusses how consumers perceive greenwashing and the impact of false or substantiated claims on consumer trust.