Greenwashing Premium

Greenwashing is framed as a signalling game between firms and investors and occurs due to cheap news signals. A worst social outcome occurs with a pooling equilibrium. Firms greenwashed if ex-ante they are in the top decile of a portfolio sorted by ESG news scores from NLP, and ex-post fell out from the top decile for ESG performance scores. The greenwashing premium for ESG in USA is historically not significant but episodic. The premium in 2020 was largely due to consumer and green firms at 2.9% and 4.2% respectively. It was larger for the ‘E’ and ‘G’ than the ‘S’ pillar, except amongst brown firms. A mechanism design is proposed to conceptually incentivise firms to keep to their ESG goals