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Does Greenwashing Pay Off? Understanding the Relationship Between Environmental Actions and Environmental Legitimacy

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Abstract

Do firms gain environmental legitimacy when they conform to external expectations regarding the natural environment? Drawing on institutional logic and signaling theory, we investigate sources of heterogeneity in the impacts of environmental actions on environmental legitimacy. Longitudinal data (1997–2001) about 325 publicly traded U.S. firms in polluting industries support the notion that environmental actions help firms gain environmental legitimacy. However, some actions instead can harm this legitimacy if environmental performance deteriorates and the firm is subject to intense scrutiny from nongovernmental organizations. Thus, an important contribution of this research is to identify conditions under which greenwashing can backfire.

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Notes

  1. Hsu and Ziedonis (2013) and Hoenen et al. (2014) show that patents have signaling value in early rounds of venture capital financing. However, their signaling value diminishes as information asymmetries between investors and funded firms lessen.

  2. The arguments we develop apply to the level of environmental performance too, but we assert that it is easier for stakeholders to react to changes (positive or negative) in environmental performance rather than to assess the level in absolute terms. Thus, our underlying assumption is that environmental legitimacy depends more on the slope than on the level of environmental performance. Nevertheless, we include the levels as a control measure in the econometric specification.

  3. Namely, SIC codes 10, 50, 33, 49, 28, 36, 12, 13, 20, 32, 30, 51, 26, 34, 29, 31, 35, 37, 24, and 27.

  4. In a recent paper, Matejek and Goossling (2014) describe processes of building, losing, and repairing environmental legitimacy in the context of the Deepwater Horizon case. They show that “technological development and unlimited progress” was at the heart of BP’s communications as it sought to influence its green corporate image. The company used its environmental innovation to regain some of its environmental legitimacy.

  5. We also searched for the presence of an environmental Vice President (VP) and found very few companies with this position during our period of analysis (less than 10 %). The inclusion of these additional firms did not change the results as described in footnote v.

  6. The name of the dedicated board committee varies across firms, as Klettner et al. (2014) note. Some firms refer to “safety, health and environmental affairs” or “environmental compliance” committees. For simplicity, we use “environmental committees,” which all refer to committees within boards of directors.

  7. This information was generously provided by a representative of the EPA’s WasteWise Program. In the United States alone, there are more than 200 such programs (Delmas and Keller 2005), most of which focus on specific sectors or topics for a limited time and select participants.

  8. In recent years (after our sample period), the USPTO grew more stringent, denying applications that used the term “green” too generically or descriptively (LegalZoom, 2011, http://www.legalzoom.com/intellectual-property-rights/patents/registering-green-trademarks. Accessed March 22, 2014).

  9. Variation of press coverage is difficult to interpret. Perfectly legitimate organizations might be so taken for granted that they are no longer scrutinized. Alternatively, notably stigmatized organizations may wish to remain invisible in the news to avoid public attacks, even if, in some circumstances, visibility is a valuable asset (Deephouse and Suchman 2008 ).

  10. The average marginal effects computed with the Tobit model (Model 2), evaluated at different percentiles of environmental impact as the moderator variable (Hoetker 2007; Huang and Shields 2000), were consistent with those from the OLS model with random effects (Model 1) in sign and significance. This consistency held for all other moderators.

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Acknowledgments

The first author indebted to the Schneider-Electric Sustainability and Business Strategy Chair as well to the Spanish Ministry of Economy and Competitiveness (ECO2012-33018) and the BBVA Foundation for providing financial support.

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Authors and Affiliations

  1. Department of Strategic Management, IESE Business School, University of Navarra, Camino del Cerro del Águila, 3, 28023, Madrid, Spain

    Pascual Berrone

  2. Department of Management & Technology, and CRIOS, Bocconi University, Via Roentgen 1, 20136, Milan, Italy

    Andrea Fosfuri

  3. Department of Economic Environment, IE Business School - IE University, Calle Serrano, 105, 28006, Madrid, Spain

    Liliana Gelabert

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  1. Pascual Berrone
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  3. Liliana Gelabert
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Correspondence to Pascual Berrone.

Appendix

Appendix

Environmental Legitimacy Measure

$$\begin{aligned} {\text{Environmental legitimacy}}_{\text{it}} &= \frac{{(p_{\text{it}}^{ 2} - p_{\text{it}} n_{\text{it}} )}}{{T_{\text{it}}^{2} }}\quad{\text{if}}\quad p_{\text{it}} > n_{\text{it}} \hfill \\ &= \frac{{(p_{\text{t}} n_{\text{t}} - n_{\text{t}}^{2} )}}{{T_{\text{it}}^{ 2} }}\quad{\text{if}}\quad p_{\text{it}} < n_{\text{it}} \hfill \\ &= 0 \qquad \qquad{\text{ if}}\quad p_{\text{it}} = n_{\text{it}} \hfill \\ \end{aligned} ,$$

where p it is the number of legitimating environmental articles about firm i in year t, n it is the number of legitimacy-challenging environmental articles about firm i in year t, and T it is the total number of articles about firm i in year t (T t = p t + n t).

Environmental Performance Measure

We obtained a weighted waste score for each facility:

$$ww_{\text{jt}} = \sum\limits_{\text{k}} {\sum\limits_{\text{l}} {E_{\text{klt}} } } \times f_{\text{kl}},$$

where \(E_{\text{klt}}\) is the emissions of chemical l to medium k in year t by facility j, and \(f_{\text{kl}}\) is the weighting factor corresponding to chemical l emitted to medium k. Next, we predicted waste generation using the reported production ratios:

$$\text{P} {\text{redicted\_waste}}_{\text{it + 1}} = \sum\limits_{\text{j}} {ww_{\text{jt}} } \times PR_{\text{jt + 1}}.$$

Finally, we computed the difference between actual waste and predicted waste and aggregated the values at the parent firm level to obtain a firm measure of pollution prevention:

$${\text{Pollution prevention}}_{{{\text{it}} + 1}} = \sum\limits_{\text{j}} {ww_{\text{jt}} } \times PR_{\text{jt + 1}} - \sum\limits_{\text{j}} {ww_{\text{jt + 1}} } ,$$

where j are facilities that belong to firm i. If the actual waste level is lower than the predicted level, pollution preventionit+1 yields positive values, indicating a reduction of waste generation. Thus, bigger values are associated with better environmental performance.

Environmental Patents Index

$${\text{Environmental patents}}_{\text{it}} = w_{\text{it}}\times {\text{Patents}}_{\text{it}}{,} \quad{\text{with }}w_{\text{it}} = \frac{{({\text{Citations}} \div {\text{patents}})_{\text{it}} }}{{\frac{{\sum_{i = 1}^{i = N} {({\text{Citations}} \div {\text{patents)}}_{\text{it}} } }}{{N_{\text{t}} }}}}$$

and where patentsit denotes total environmental patents of firm i granted during year t, citationsit is all the citations received by the patents granted to firm i during year t, and N t denotes the total number of firms in the sample for year t.

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Berrone, P., Fosfuri, A. & Gelabert, L. Does Greenwashing Pay Off? Understanding the Relationship Between Environmental Actions and Environmental Legitimacy. J Bus Ethics 144, 363–379 (2017). https://doi.org/10.1007/s10551-015-2816-9

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