Business Ethics, the Environment & Responsibility Journal

By: Valeria Venturelli, Alessia Pedrazzoli, Daniela Pennetta, Gennaro De Novellis, 28 July 2024

This article investigates the critical impact of ESG washing on banks’ reputations in this insightful study. Exploring data from 120 banks across 35 countries between 2014 and 2020, the research reveals how discrepancies between environmental and social disclosures and their actual implementation can either heighten or reduce reputational risks. With a focus on how environmental inconsistencies amplify reputational exposure, while social discrepancies may mitigate it, the study also highlights the role of citizen movements and legal systems in shaping these outcomes. Gain valuable insights into the importance of verified ESG information and its implications for the global banking industry.

Topics covered:

  • ESG washing and its impact on banks’ reputational risk
  • Greenwashing and social washing
  • Analysis of why greenwashing negatively affects reputation, while social washing has a positive effect
  • Transparency and accessibility of environmental performance vs. social performance in banks
  • The role of information asymmetry in detecting ESG washing
  • Institutional factors (legal systems and stakeholder scrutiny) on ESG washing’s reputational impact
  • Theoretical implications of ESG washing on signalling and stakeholder theories
  • Difference between symbolic and substantive actions in environmental and social contexts
  • Insights into how reputational risk in banking relates to systemic financial risk
  • Managerial and policy implications for addressing ESG washing and enhancing reputational risk management
  • Developing alternative ESG washing measures and methodologies for further investigation

ESG washing is defined as reporting environmental and social performance that does not match the bank’s actual performance in these areas. We find that greenwashing negatively affects reputation, while social washing positively affects it.

Our findings suggest that the differences may be because (1) the environmental performance of banks is typically objective, quantifiable and readily accessible in the market. This transparency aids stakeholders in discerning banks that may engage in greenwashing practices; (2) information asymmetry between stakeholders and banks and the difficulties in monitoring social performance make the identification of social washing less likely, so we argue that social washing is less prone to detection and less likely to be penalised in terms of reputational risk and (3) institutional aspects such as the legal system and stakeholder scrutiny amplify or mitigate the impact of green and social washing on banks’ reputational risk. Indeed, banks in countries with high stakeholder expectations as to the natural environment (proxied by the presence of Fridays for Future) result in significant reputational risks in the case of both social and greenwashing. These findings introduce ESG washing in the banking industry, supporting the necessity for accurate and validated information regarding both green and social claims in all economic sectors.

Valeria Venturelli, Alessia Pedrazzoli, Daniela Pennetta, Gennaro De Novellis, 28 July 2024

Read this Article