Greenwashing Illusion and Financial Performance: The Moderating Role of Environmental Practices

Abstract

This study explores the growing concern over greenwashing and its impact on the financial performance of European-listed banks from 2005 to 2021. Financial performance is evaluated using three key indicators: Return on Assets (ROA), reflecting operational efficiency; Return on Equity (ROE), indicating returns to shareholders; and Tobin's Q, representing market-based valuation relative to assets. The study is novel in linking greenwashing with authentic environmental practices and evaluating the influence of genuine sustainability initiatives on financial outcomes. Results indicate that greenwashing negatively affects financial performance by reducing market valuation and shareholder returns, as shown by declines in Tobin's Q and ROE, whereas being associated with short-term operational gains, evidenced by higher ROA. Moreover, genuine environmental initiatives mitigate the adverse effects of greenwashing on Tobin's Q and ROE and enhance its positive influence on ROA. These findings highlight the critical role of credible environmental strategies in managing reputational risks and supporting sustainable financial outcomes, offering practical insights for banks, regulators, and investors seeking to align corporate sustainability with financial performance.