The High Cost of Looking Green
Firms can try to launder their environmental transgressions, but it costs them hard cash in the end
Plenty of companies lean into grand ESG gestures, shouting from the rooftops how their commitments to sustainable business practices will save the planet. They issue flashy ESG reports to bolster their credibility with investors and consumers — but these can often be heavy on style and light on legitimacy.
Greenwashing — the marketing of environmental actions that are overstated or even entirely untrue — has become a more frequent way to redirect attention from a company’s more questionable environmental impact. In 2023, a data provider that monitors ESG business conduct and risk identified a 35 per cent increase in greenwashing incidents globally from the previous year, and while 2024 recorded the first overall decline in years, severe greenwashing incidents that same year surged by 30 per cent.
As greenwashing has become more common, researchers have focused on understanding, categorizing, and detecting it, as well as its impact on firm reputation and consumer behaviour. For example, studies have shown that greenwashing can harm brands’ reputations and turn consumers off companies that are caught falsifying their greenness.
While the reputational risk of greenwashing is becoming well established, a new co-authored study by Olaf Weber, a research fellow at Smith’s Institute for Sustainable Finance and a professor at Schulich School of Business, specifically explores how lenders respond to the impacts of greenwashing.
Weber, along with Simone Taddeo (Euro-Mediterranean Center on Climate Change), Andrea Regoli (University of Naples Parthenope) and Rosella Carè (University of Waterloo and University Magna Graecia of Catanzaro), wanted to know if firms that engage in greenwashing face a higher cost of debt, and if that relationship reflects persistent reputational traits or short-term deviations?
What they found reinforces why coherence between what firms report and how they perform with regard to ESG is a financial imperative.
Risky Marketing
To figure out whether firms with higher levels of greenwashing face a higher weighted average cost of debt, the researchers needed a way to evaluate who was walking the talk, and who was just talking. They examined data of 411 global S&P 500 companies, spanning 2014 to 2023. The data came from LSEG Workspace and Bloomberg, the former measuring ESG performance and the latter assessing disclosure and reporting quality. A firm’s greenwashing score was determined by the misalignment between this disclosure and performance.
“If you publish an ESG report that has all the data that is usually expected and that is well written, you get a 10 out of 10 for reporting no matter whether you are a high or low GHG emitter even compared to your industry peers,” explains Weber. “The assessment of the emissions themselves can be independent from the reporting quality.”
With this greenwashing measure in hand, the researchers compared it to the company’s after-tax cost of debt. The result? Companies can wash but they don’t get away clean.
The credit risk is higher for companies that greenwash, indicating that lenders are paying attention to environmental claims and performance, particularly when the former is not reflective of the latter. The result is often higher interest rates, up to an increase of 9.1 basis points per unit of greenwashing.
As more lenders and investors become suspicious of claims made by these companies, these results point to ESG honesty as another form of intangible capital, influencing how companies have their risk assessed and how investors think of their long-term survival.
These findings support other recent research that shows bank loans are more expensive for companies that are seen as bigger ESG risks.
Credibility is Cash
For firms, these financial and reputational impacts can be hard to shake. The researchers find that making improvements or even fulfilling sustainability commitments doesn’t mean a quick reputation turnaround – the impact can last much longer. Investors that are looking for longer-term places to park their money might avoid those companies.
There is still a lot left to unpack. For example, the authors point out, there needs to be research about how the financial burden of greenwashing is evolving, and how more daylight to the practice coming from, say, activist investors and rating agencies, might sway debt markets.
There’s also an increasing amount of legislation designed to combat greenwashing. The European Union passed anti-greenwashing regulations in 2024, as did Canada with Bill C-59 (which was later amended with Bill C-15 in 2025). Here the questions remain whether these legislations will decrease greenwashing and create market confidence, and what the financial consequences of greenwashing under stricter regulations are.
Regulations aside, research which firmly links financial performance and greenwashing, with proof of cause and effect using reliable indicators, shows that lenders consider greenwashing as a risk that they price no matter the recent ESG backlash from the U.S., says Weber.
“I think there is a lot of evidence that ESG and greenwashing is financially material. Hence, it is a tough case saying ESG doesn’t matter,” he says.