In this study, we investigate how internal and external monitoring systems can help
combat greenwashing. We propose a novel, incident‐based measure to investigate the
greenwashing behavior of 1218 large and mid‐cap companies across different industries
between 2008 and 2020. These companies are constituents of the MSCI World Index, covering
23 developed market economies. We consider a company to be engaged in greenwashing
if it improves its environmental ESG subscore while simultaneously being responsible
for severe environmental damage. According to our greenwashing indicator, about 7%
of the companies were involved in greenwashing at least once during the 13‐year sample
period. The proportion of greenwashing companies is highest in the energy, utilities,
and materials industries. We find evidence that both internal and external monitoring
mechanisms can be effective in deterring companies from adopting greenwashing strategies.
Firms with more independent board members, attracting more attention from the investors,
and headquartered in countries where the population is more environmentally aware
are significantly less likely to engage in greenwashing. The awareness of the population
is a key factor especially in the energy, utility, and material sectors.
