Greenwashing firms secure lower rates, monetary policy reduces benefits

Greenwashing, the deceptive self-portrayal of companies as sustainable, poses a significant challenge in finance.

This study, using granular credit data from the euro area (2019-2023), reveals that firms initially identified as greenwashers—by combining carbon emissions with reporting reliability—were able to secure loans at lower interest rates.

The research further assesses environmental profiles by extracting textual information from newspapers and company websites.

It finds that sentiment scores from firms' own websites are generally higher than those from external news, suggesting a deliberate emphasis on sustainable image in internal communication channels.

This textual metric is then integrated to construct an alternative, more robust definition of greenwashing.

Green financing, vital for addressing climate change, is significantly hampered by greenwashing—firms providing misleading environmental information.

This deception complicates banks' assessment of climate-related risks, potentially leading to mispricing, distorted credit allocation, and exposing lenders to reputational and transition risks.

Regulatory efforts, such as the EU SFDR and NFRD, aim to boost transparency but are hindered by a lack of clear standards and an incomplete EU taxonomy.

Both the ECB and ESMA have documented poor data quality and a rise in greenwashing controversies.

These dynamics are further influenced by unexpected monetary policy shocks, which can alter banks' incentives to screen borrowers.