Why greenwashing might signal something worse in your climate stock

By David Callaway  •  February 26, 2026
body of water surrounded by trees during daytime
Photo by Nicole Herrero on Unsplash

(Mark Hulbert, an author and longtime investment columnist, is the founder of the Hulbert Financial Digest; his Hulbert Ratings audits investment newsletter returns.)

CHAPEL HILL, N.C. (Callaway Climate Insights) — Evidence of a company’s greenwashing is crucial information even for investors who couldn’t care less about the climate.

That’s because greenwashing betrays a company’s broader corporate culture. If it’s willing to bend the truth about its sustainability efforts, if not outright lie, chances are good it’s engaging in equally questionable behaviors elsewhere.

That’s the implication of a just-completed study that earlier this month began circulating in academic circles. Titled “Greenwashing and Tax Avoidance,” the study was conducted by Heng Zhao and Noor Houqe of Massey University (New Zealand), Olayinka Moses of the University of Wellington’s Victoria Business School (New Zealand), and FJ Abu Mohaimen of North South University (Bangladesh).

Greenwashing of course refers to a company overstating and exaggerating (if not worse) how much it is doing and has achieved in becoming carbon neutral. To quantify how much greenwashing has occurred, the researchers relied on ESG disclosure and performance scores from Refinitiv Eikon (part of LSEG) and Bloomberg. They used those scores to produce a Greenwashing Index (GWI) for each of the companies within the S&P 500 for the years 2002 through 2022.

To measure whether a company’s GWI was correlated with pushing the envelope on other issues, the researchers focused on tax avoidance and other controversial tax practices. To quantify those practices, they relied on a number of data points such as the ratio of a company’s actual taxes paid to its profits before taxes and the ratio of taxes paid to operating cash flow.

Note carefully that the researchers can’t tell from the tax data whether companies with low rates are engaging in aggressive but nevertheless legal tax strategies (tax avoidance) — or stepping over the line (tax evasion). But they do cite evidence indicating that many companies worry about the reputational risk of paying consistently lower tax rates than comparable firms. That at least suggests that many of these firms are engaging in tax strategies that, if not outright illegal, would at least not be universally applauded by investors.

The researchers use the term “tax avoidance” to refer to all strategies a company might use to reduce its tax rate, whether legal or not. They discovered a strong correlation between companies’ GWI levels and the extent of their tax avoidance. “Firms exhibiting higher levels of greenwashing report significantly lower effective tax rates and reduced cash tax payments,” the researchers write, “consistent with more aggressive tax avoidance. Importantly, greenwashing is associated not only with contemporaneous tax outcomes but also with persistently lower tax burdens over a multi-year horizon, indicating sustained tax avoidance strategies rather than short-term tax planning.”

This correlation was strong enough, in fact, that the researchers believe their finding could be of use to the IRS and other tax authorities. A high Greenwashing Index “may serve as a useful risk signal, highlighting firms for closer scrutiny and facilitating coordination between ESG oversight and tax enforcement.”

Culture matters

A corollary of this new study’s findings is that companies don’t invent new behavior patterns when it comes to honestly reporting their sustainability efforts. A company that pays its fair share of corporate taxes, for example, is unlikely to turn around and engage in greenwashing — and vice versa.

As the researchers put it: Their findings “suggest that greenwashing forms part of a broader opportunistic strategy in which symbolic sustainability narratives accompany substantive financial extraction.”

Climate-focused investors can use this new study to help them better pinpoint those companies that are most likely to support their sustainability goals. In addition to focusing on the traditional ESG criteria, they should also search for evidence of malfeasance in any aspect of a company’s operations. Does that company pay a consistently lower tax rate than comparable companies in its industry? Has the company been investigated by the IRS (or other tax agency) for possible tax law violations? Have its executives engaged in insider trading that possibly violates SEC rules?

No one instance of such investigations will necessarily be an automatic reason to exclude the company. But over time a company’s broader culture will come into focus. And if that culture is one that tolerates and even encourages cutting corners, the company is unlikely to be more than a fair weather friend to the environment — no matter what its press releases may say.

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