1. Introduction
In March 2021, the Securities and Exchange Commission (SEC) established the Climate and ESG Task Force to actively detect any misconduct associated with environmental, social, and governance (ESG) matters. One of the major violations that the Task Force has encountered in identifying ESG-related misconduct is ESG greenwashing. Greenwashing is defined as a deceptive practice where a company’s assertions regarding sustainable development do not align with its actual business activities [
1]. It involves presenting positive communication about environmental efforts despite poor environmental performance [
2]. For example, Vale of Brazil, one of the world’s largest iron ore producers, issued misleading ESG information regarding dam safety. Subsequently, the dam collapsed, killing 270 people and resulting in a loss of at least
$4 billion in market capitalization. However, Vale is not the only corporation implicated in greenwashing practices. According to Ogilvy and Mather, the prevalence of greenwashing has escalated to ‘epidemic proportions’ [
3]. Research further supports this concern, revealing that 98% of products advertised with environmental benefits are guilty of some form of greenwashing [
4].
The skyrocketing incidence of greenwashing has the potential to severely damage customer trust in environmentally friendly products and services, hence decreasing the market for them [
1,
5,
6]. Similarly, the market for socially aware investments may be weakened by greenwashing, which can have a negative effect on investor confidence in environmentally conscious companies [
7,
8]. Moreover, ESG greenwashing exposes companies to legal repercussions if investors, NGOs, or government agencies contest the accuracy of their ESG statements. Like Vale, which was previously noted, the business is facing a permanent injunction that the SEC has requested. Lawsuits have also been brought against firms for deceptive advertising regarding the environment [
9]. Honda, for instance, settled a class action lawsuit for making false and deceptive claims about a hybrid car’s fuel economy. Why, then, do firms still engage in ESG greenwashing in spite of these risks? A significant contributing element to the persistence of ESG greenwashing is the absence of thorough market monitoring.
A potential solution to the lack of a market monitoring force is financial analysts. Financial analysts, recognized as expert authorities, analyze firm performance and offer strategic insights [
10]. By assessing target stocks, they project future performance and provide investment guidance [
11]. Numerous studies have indicated that analysts are conducive to mitigating information asymmetry, thereby acting as a deterrent against managerial opportunistic behavior [
12,
13,
14]. A typical example is Yu (2008) [
15], which demonstrates that firms with greater analyst coverage exhibit lower instances of earnings management. This effect is referred to as the ‘monitoring hypothesis’, arguing that financial analysts mitigate opportunistic behavior through reducing information asymmetry.
An alternative hypothesis posits an opposing prediction, suggesting that financial analysts may inadvertently contribute to managerial opportunistic behavior by exerting excessive pressure on managers. Specifically, analysts are tasked with projecting short-term earnings and formulating corresponding stock recommendations. When analysts anticipate a decline in a company’s short-term earnings, they generally lower their forecasts and issue negative recommendations. These actions, however, can provoke negative market responses and may lead to potential sanctions for managers [
16,
17]. Faced with such outcomes, managers may prioritize short-term earnings targets in line with analyst forecasts, often at the expense of the company’s long-term value [
18]. This effect is referred to as the ‘pressure hypothesis’ of analysts, arguing that financial analysts exacerbate managerial opportunistic behavior by imposing pressures on managers.
According to the monitoring hypothesis, if analysts accurately communicate the real ESG performance of companies to the capital market, aiding stakeholders in recognizing the genuine value of these long-term endeavors, then management would be less likely to engage in ESG greenwashing. Therefore, analysts may play a monitoring role and thereby mitigate their ESG greenwashing practices. Conversely, the pressure hypothesis argues that increased analyst coverage might lead managers to prioritize short-term earnings over long-term firm value. As a kind of long-term activity, ESG practices are more likely to be sacrificed as they may not generate immediate financial returns. Furthermore, ESG disclosure has been proven to be a tool for manipulating surpluses to align them with the expectations of analysts [
19,
20]. Consequently, analysts could also be able to exacerbate the ESG greenwashing of managers.
We test the two competing hypotheses mentioned above by examining the role that analysts can play in detecting instances of ESG greenwashing. We analyze data comprising 8498 annual records from 1282 firms listed on the China A-share market, spanning from 2012 to 2022. As for the measurement of ESG greenwashing, it refers to the significant disparity between a firm’s actual ESG performance and what it reports in its ESG disclosures, sourced from Bloomberg and the Huazheng database. Then, we obtain analyst coverage and company fundamental information from the CSMAR database. Our study reveals that analyst coverage exerts pressure on management, thereby exacerbating their engagement in ESG greenwashing in China, which aligns with the pressure hypothesis of analysts. Furthermore, the facilitation effect of analysts’ concerns on ESG greenwashing can be intensified among firms that prioritize reputation. The robustness of our results is confirmed through a battery of tests, including instrumental variable regression and propensity score matching.
Our research contributes to the literature concerning the external market drivers of ESG greenwashing by identifying financial analysts as influential actors in this dynamic [
21,
22,
23]. Building upon the frameworks established by Alves (2009), Delmas and Burbano (2011), and Kim and Lyon (2015) [
21,
22,
23], which highlight consumer, investor, and competitor-induced incentives, we propose that analysts also play a critical role. Firms often engage in ESG greenwashing to align with analysts’ earnings forecasts, mitigating potential negative impacts on their investment attractiveness and share prices. Moreover, we propose that the pressures from analysts are, in fact, a reflection of broader investor expectations. This connection means that when analysts exert pressure, they indirectly compel firms to engage in greenwashing as a response to the perceived risk of less attractive investment opportunities stemming from unmet earnings forecasts and the resultant potential decline in share prices. Thus, the pressure to engage in greenwashing is not merely a direct response to analyst expectations but is deeply intertwined with a need to meet broader investor demands. We not only identify a new dimension of market-driven ESG greenwashing but also clarify the mechanisms through which such pressures are transmitted.
Our research uncovers a compelling insight into the relationship between analyst coverage and ESG greenwashing in China. Existing literature generally indicates that financial analysts are pivotal in diminishing information asymmetry and serving as external overseers for corporate management [
15,
17,
24,
25]. However, we find that in the relationship between analyst coverage and ESG greenwashing, the monitoring role of analysts is diminished; rather, Chinese analysts appear to assume the role of pressure-givers, actively contributing to ESG greenwashing. This divergence from the finding of Hinze (2019) [
26] posits that analyst monitoring boosts sustainable engagement in Germany. This phenomenon can be partially attributed to ESG development being government-led in China, coupled with the absence of a harmonized ESG disclosure framework and mandatory assurance requirements. These factors create challenges for market forces, including analysts, to effectively exert a monitoring influence. When such monitoring proves ineffective, analyst coverage may transform into pressure, potentially exacerbating ESG greenwashing. This insight contributes to the analyst pressure hypothesis and broadens the discussion on the adverse effects of analysts [
18,
27]. Simultaneously, our finding underscores the significant role that government policy plays in shaping ESG practices in emerging markets, pointing out the relative immaturity of the capital markets in such contexts. Additionally, we are pioneers in exploring how firm reputation moderates the relationship between analyst coverage and ESG greenwashing. While firm reputation is generally seen as a deterrent against unethical corporate behavior due to the potential risks to a company’s public image and stakeholder trust [
28,
29,
30], our study reveals its limitations in disciplining companies against ESG greenwashing. The fragile nature of reputation—where companies are strongly motivated to avoid any action or information that could tarnish their image—does not necessarily prevent greenwashing practices. Instead, it may simply lead companies to more carefully manage the disclosure of such activities rather than curtail them entirely. We expanded on the literature addressing the dark side of firm reputation [
31,
32] by investigating how firm reputation positively moderates the relationship between analyst coverage and ESG greenwashing.
Our research carries significant practical implications for emerging markets to enhance ESG development. In most emerging markets, ESG development is predominantly driven by government initiatives. Under such environments, it is crucial for governments to amplify their efforts in guiding market activities towards sustainable practices. This approach could progressively foster a more robust ESG market, as exemplified by initiatives like the dual carbon policy of China, which intends to reach carbon neutrality by 2060 and peak carbon emissions before 2030. Moreover, our findings highlight a critical gap in the role of analysts in overseeing ESG practices, primarily due to the lack of uniform ESG disclosure standards and mandatory assurance requirements. This disparity not only hinders effective monitoring but also complicates efforts to maintain accountability across different industries. Consequently, there is a pressing need to accelerate the development and implementation of harmonized ESG disclosure standards and mandatory assurance requirements. Such standards would enhance transparency and consistency, thereby empowering analysts to more effectively scrutinize and hold firms accountable for their ESG claims.
It is important to clarify that our intention is not to diminish the role of analysts in this framework. Instead, we aim to highlight the crucial need for more robust ESG regulations that can bolster analyst oversight capabilities. Strengthening these regulations would not only empower analysts but also significantly reduce the prevalence of ESG greenwashing. This approach underscores the dual need for government action to guide sustainable market practices and for global standards that can unify and clarify ESG disclosures, creating a more transparent and accountable corporate landscape.
4. Data and Empirical Design
4.1. Data Resource
To test our hypotheses, we analyze a sample of Chinese A-share listed firms, excluding ST companies and those in the financial industries. Chinese A-share listed firms are companies that are publicly traded on stock exchanges in mainland China, such as the Shanghai Stock Exchange and the Shenzhen Stock Exchange. The bulk of data used in studies of the Chinese capital market typically comes from A-shares. Given that the A-share market is the largest stock market in China, its substantial trading volume not only provides a rich dataset for research but also enhances the reliability and representativeness of the research findings. The sample includes 8498 observations from 1282 listed companies, spanning from 2012 to 2022. We chose this time range for several reasons. First, for data availability, the scores used to calculate the degree of greenwashing are provided by rating agencies, so we started collecting data from the year these agencies began publishing their scores. Second, short-term data are often subject to various fluctuations, whereas data over a longer period offer a more comprehensive view and enhance the stability and precision of statistical analysis.
We collected firm-level variables from the CSMAR database. The CSMAR Database (China Stock Market & Accounting Research Database) is an accurate, research-oriented database focused on economics and finance. Developed by Shenzhen Xishima Data Technology Co., Ltd. (Shenzhen, China), it is tailored to meet the needs of academic research. The database draws on the professional standards of authoritative databases such as CRSP, COMPUSTAT, TAQ, and THOMSON, while also accommodating the specific context of China. CSMAR is notable for being the first data provider from Greater China to join the WRDS (Wharton Research Data Services) research data platform of the Wharton School. The database comprehensively covers aspects such as listed companies’ financial statements, trading quotes, and unstructured news and information. Therefore, it is widely used by researchers studying the Chinese capital market to obtain detailed company-level data. Additionally, it includes research reports and company announcement data, which significantly enhances the accuracy and reliability of the data provided.
Apart from fundamental corporate attributes, our primary interest lies in identifying signs of ESG greenwashing. We employ the ESG disclosure scores from the Bloomberg ESG Database. The Bloomberg ESG Database offers a comprehensive set of over 120 environmental, social, and governance indicators that accurately represent firms’ ESG disclosure practices and serve as a metric for evaluating sustainable performance. This database covers over 20,000 firms across more than 50 countries. Additionally, we use the Huazheng database to assess the actual sustainable performance of companies based on their ESG practices. The Huazheng database, a leading rating agency extensively used for ESG-related research in China, provides a valuable resource for our analysis.
In addition, we undertook the following data processing steps: (1) Samples missing key explanatory variables related to analyst coverage data were excluded. (2) Observations from companies categorized under finance and insurance, as well as those labeled as ‘ST’ or ‘ST*’, were removed. (3) Samples lacking dependent and control variable data were excluded. (4) A trimming procedure was applied to the continuous variables, capping them at the 1% upper and lower percentiles. Following these criteria, the study ultimately encompassed 1282 listed companies, yielding 8498 annual observational data points.
4.2. Variable Design
4.2.1. ESG Greenwashing
Greenwashing refers to a deceptive practice where a company’s assertions regarding sustainable development do not align with its actual business activities [
1]. It involves presenting positive communication about environmental efforts despite poor environmental performance [
2]. Consistent with Yu et al. (2020) [
39], we define greenwashing as firms attempting to portray a facade of sustainable performance by selectively disclosing ESG data while exhibiting inadequate performance in actual ESG terms.
In accordance with Zhang (2022a) [
63], we use our criteria to determine a company’s sustainable efficiency and then compute its peer-relative greenwashing score. The difference between a normalized measure of a firm’s position in the distribution of its ESG real performance score relative to its peers and a normalized measure of the firm’s position in the ESG disclosure score distribution relative to its peers is the firm’s peer-relative greenwashing score, according to Equation (1). A larger disparity denotes a higher degree of greenwashing, which is an indication of the company’s ineffective sustainable performance.
The first term denotes the standardized representation of a company’s position in the distribution of the disclosure score for environmental rating (ER) relative to its peers. The second term serves as an indicator of the company’s standing in relation to its peers in terms of the distribution of its real environmental rating performance score. Specifically, and represent the average values of ESG disclosure and performance scores, respectively. The standard deviations of the performance scores and environmental disclosure are denoted by the and , respectively. In fact, the Bloomberg ESG rating is considered the ESG disclosure score, while the Huazheng ESG rating is regarded as the ESG true performance score.
4.2.2. Coverage
Securities analysts can be broadly divided into two categories: buy-side and sell-side analysts. Buy-side analysts typically work for institutional investors such as asset management firms, pension funds, and hedge funds. Their primary role is to generate investment recommendations to help these institutions make informed investment decisions. On the other hand, sell-side analysts are employed by securities firms, investment banks, or independent research institutions. These institutions assign analysts to analyze publicly listed companies. Sell-side analysts evaluate these companies and produce research reports, which are then distributed to external clients, including institutional and individual investors, to aid in their investment decision-making processes. Our research specifically focus on the role and impact of sell-side analysts.
Generally, it is uncommon for an institution to assign more than one analyst to follow the same listed company. Consequently, following Yu (2008) [
15], we define analyst coverage as the total number of analysts who provided forecasts for a firm during a given year. Specifically, we employ the natural logarithm of this number as a quantitative metric to assess the extent of analyst coverage for the firm throughout the year. This approach offers a more direct method for assessing the extent of analyst coverage and is therefore frequently used in related research.
In robustness testing, we also employ the number of analysts publishing research reports as a proxy variable. We use this figure since the majority of analysts release at least one earnings projection for a company each year, and most of them release at most one forecast per month [
27].
4.2.3. Control Variable
Consistent with the previous literature, we include a vector of control variables in our analysis. These variables comprise Enterprise Size, Gearing Ratio (Lev), Return on Assets (ROA), Enterprise Cash Holding Level (Cash), Enterprise Revenue Growth Rate (Growth), Equity Concentration (Top1), Board Size (Board), Percentage of Independent Directors (Dep), and Institutional Shareholding (Inst). Additionally, we control for the industry (IND) and year (YEAR) to which the firm belongs.
Table 1 provides a summary of all variables.
4.3. Model Design
To test our hypothesis, we calculate the likelihood of a firm being categorized in the greenwashing group by employing the following model:
where
represents the level of greenwashing of listed company
i in year
t,
denotes the analysts coverage of listed company
i in year
t, and
stands for a series of control variables.
indicates the industry-fixed effects that do not change over time for industry
i,
controls for time-fixed effects, and
is the random error term.
If hypothesis H1 is confirmed, the coefficient of would be significantly positive, suggesting that more analyst coverage would increase the ESG greenwashing of firms.
8. Conclusions, Implications, and Limitations
8.1. Theoretical Implications
First, our research contributes to the literature on the drivers of ESG greenwashing [
21,
22,
23]. Building upon the framework established by Delmas and Burbano (2011) [
22], which highlighted consumer, investor, and competitor-induced incentives, we propose that analysts also play a critical role. Our research superficially examined how analyst coverage shapes managerial greenwashing and reflects broader investor expectations. When analysts exert pressure, they indirectly compel companies to engage in greenwashing as a reaction to the diminishing attractiveness of investments and falling share prices that result from missed earnings forecasts. Therefore, the pressure to participate in ESG greenwashing is not merely a direct response to analysts’ expectations but also an effort to maintain investment appeal and meet investor demand.
Second, our research uncovers a significant relationship between analyst coverage and ESG greenwashing in China, adding to the extensive literature on the effects of financial analysts. While previous studies [
15,
25] demonstrated the value of analysts in reducing information asymmetry and acting as outside observers, our findings reveal a contrasting role in ESG reporting within the Chinese context. Specifically, we find that analysts often act as pressure-givers, contributing to ESG greenwashing to meet short-term earnings expectations. This finding diverges from Hinze (2019) [
26], who observed that analyst monitoring boosts sustainable engagement in Germany. In China, the divergence in ESG practices can be partly attributed to the government-led nature of ESG development and the absence of a standardized ESG disclosure framework. This lack of uniformity makes it challenging for market forces, including analysts, to effectively oversee corporate ESG practices. However, when such monitoring proves ineffective, analyst coverage may transform into pressure, potentially intensifying instances of ESG greenwashing. This insight contributes to the analyst pressure hypothesis and the broader literature on the adverse effects of analysts [
18,
27].
Third, we are pioneers in examining the moderating effect of firm reputation on the relationship between analyst coverage and ESG greenwashing. Much of the firm reputation literature describes its positive effects, such as drawing top-tier talent and devoted clientele, assisting in the procurement of vital resources, strengthening stability in turbulent times, and permitting companies to demand higher prices for their goods and services [
28,
29,
30]. However, in this study, our findings reveal firm reputation’s limitations in disciplining companies against ESG greenwashing, because protecting reputation against more severe penalties is one of the motivations for many management to conduct ESG greenwashing with a high level of analyst coverage. We contributed to the literature on the dark side of firm reputation [
31,
32] by examining the positive moderating effect of firm reputation on the relationship between analyst coverage and ESG greenwashing. Actually, the statement emphasizes that corporate reputation serves as a double-edged sword. On the one hand, a strong reputation can yield significant benefits for a company. However, there are instances where management may engage in practices that, while aimed at maintaining this reputation, could ultimately harm the long-term value of the business.
8.2. Practical Implications
Our findings provide important practical insights for stakeholders such as policymakers, standard-setting organizations, regulators, investors, and corporate managers. First, the findings are favorable for policymakers to promote ESG development in China by formulating relevant policies. Our research indicates that in China, the progression of Environmental, Social, and Governance (ESG) initiatives is primarily government-driven. As such, policymakers play a critical role in reducing information uncertainty and enhancing firms’ awareness of the punitive consequences associated with greenwashing. Given this context, it is advisable for policymakers to enact more supportive measures to foster sustainability. An outstanding instance of such an effective policy is the carbon peaking and carbon neutrality goals in China. Analyst power can only be maximized when sustainable and ESG development shifts from government-led to market- and investor-led.
Second, our study illuminates the critical role of standard-setting bodies in developing frameworks that serve as benchmarks. We found that in China, extensive analyst coverage may inadvertently contribute to ESG greenwashing. This underscores the necessity for standard-setting bodies to recognize the risks posed by the lack of uniform and rigorous ESG reporting standards. In the absence of such standards, companies might exploit these ambiguities to engage in greenwashing, particularly under stringent market scrutiny. This practice not only compromises investor interests but also obstructs market transparency and efficiency. To address these issues, it is imperative for standard-setting bodies to swiftly formulate ESG disclosure guidelines that align with the International Sustainability Standards Board (ISSB). These guidelines should enhance the transparency and comparability of ESG disclosures and provide a regulatory framework. Importantly, these guidelines should be tailored to fit the national context of China and reflect its unique characteristics. Additionally, the guidelines must be precise and explicit to prevent management from using various fragmented tactics for greenwashing. Companies should be encouraged to obtain independent assurance on their ESG disclosures and to develop robust assurance guidelines to further bolster the credibility of ESG information.
Third, our study offers valuable insights for regulatory bodies. It is crucial for regulators to enhance the monitoring and enforcement of ESG reporting to ensure compliance with disclosure rules. In detail, clearly communicating the specific types of greenwashing actions could reduce regulatory uncertainty and aid in more targeted enforcement. Furthermore, our findings highlight that firms with high reputations are more likely to engage in ESG greenwashing, especially under the pressure of analyst scrutiny. This suggests that such firms should be primary targets for regulators, as they may engage in greenwashing practices to maintain their reputations. Additionally, the study reveals that the pressure from analysts to meet ESG benchmarks has a more pronounced effect on firms with poorer performance. These firms are more likely to resort to ESG greenwashing as a means to enhance their perceived performance and satisfy analyst expectations. Regulators should, therefore, also focus on these lower-performing firms to prevent deceptive practices. To strengthen these regulatory efforts, Chinese authorities could consider establishing a specialized enforcement team, similar to the SEC’s Task Force in the United States. This team would focus specifically on identifying and addressing ESG greenwashing, thereby enhancing market transparency and setting a foundation for analysts to effectively monitor such practices.
Fourth, research findings can provide investors with investment advice. Our findings make investors realize that a target stock being tracked by many analysts is not an entirely positive sign, as it is more likely to engage in ESG greenwashing. Therefore, it is important for sustainable investors to be more cautious about ESG reporting and learn to recognize possible signs of greenwashing. Additionally, our study indicates that star analysts, due to their superior professional competence and information processing capabilities, tend to reduce the incidence of greenwashing. This insight suggests that investors might place greater trust in reports from these top analysts while maintaining a critical perspective toward analyses from other sources. Simultaneously, long-term investors should be encouraged to build more stable relationships with companies and push them to implement real ESG improvements rather than just for short-term performance.
Fifth, the findings serve as a wake-up call for corporate management. Our findings reveal the fact that management uses ESG greenwash to cater to analysts’ forecasts and project a positive, environmentally friendly image. While this may yield short-term improvements in perceived ESG performance, it ultimately undermines the long-term value and genuine sustainability of the firm, risking competitive disadvantage and loss of investor trust. Therefore, to enhance the ethical climate within their organizations, managers could integrate targeted ethics training designed to educate employees about the dangers of greenwashing. Moreover, the creation of a sustainable information management system could integrate ESG-related data effectively, making it more challenging for such information to be manipulated. This system would support more transparent and reliable reporting of ESG activities, aligning them closely with the actual environmental and social impacts of the company.
Sixth, our study highlights the opportunity for the China Analyst Industry Association to enhance the capabilities of Chinese analysts in ESG development. As regulatory oversight of companies’ environmental performance and communication remains limited, industry associations are increasingly adopting the roles of monitors and information providers. Therefore, it is crucial for analyst associations to develop and implement education and training programs that focus on sustainability. By doing so, they can enhance analysts’ understanding of ESG-related issues, thereby promoting more accurate and responsible reporting in the field of environmental, social, and governance factors. Additionally, to encourage rigorous ESG scrutiny, analyst associations could establish incentives such as awards and certification programs. These programs would recognize and motivate analysts who excel in sustainable practices and are vigilant in monitoring for greenwashing.
8.3. Research Limitations
Our study does face certain limitations. Primarily, the accuracy of our ESG greenwashing measure heavily depends on ESG scores. Although we rely on scores from authoritative rating agencies to quantify ESG greenwashing, discrepancies in ESG ratings could affect the measure’s precision. To enhance the robustness of future research, qualitative methodologies such as empirical field research and interviews could be employed. During the process, focusing on determining whether a company engages in false disclosures, unfulfilled promises, and violations of ESG fund regulations is an effective way to identify genuine ESG greenwashing. By scrutinizing these specific aspects, scholars can effectively discern between companies that truly adhere to sustainable practices and those that merely present an image of sustainability to meet market expectations or regulatory requirements. Overall, this shift towards qualitative analysis could provide deeper insights into ESG practices and their reporting.
Second, the applicability of our findings may be limited geographically. The research is specifically tailored to the institutional context of China, where ESG development is predominantly driven by government initiatives. These governmental efforts shape the ways in which firms implement ESG practices, and in turn, this affects the capacity of analysts to monitor ESG greenwashing effectively. This dynamic in China may differ significantly from regions where ESG development is primarily market-led. Future studies could benefit from adopting an international perspective to examine the interplay between analysts and ESG greenwashing across different countries. Such research would allow for a comparative analysis that could illuminate the varying roles analysts play in monitoring ESG practices globally. Additionally, it would provide deeper insight into the factors that contribute to ESG greenwashing and the mechanisms through which analysts can either mitigate or exacerbate these practices in different regulatory and market environments.