HONG KONG SAR - Media
OutReach - 10 June
2021 - The days of
running businesses solely for profit are long gone. Businesses, large or small,
must make considerable efforts to be socially responsible and eco-friendly. A past survey
shows that 91 percent of global consumers expect businesses to address social
and environmental issues, and 90 percent of them would boycott a company if it
were engaged in irresponsible business practices. In other words, corporate
social responsibility (CSR) is not only a buzzword, but vital for businesses to
be successful nowadays. However, it is not always easy to tell whether a
company is really doing good or just faking it, and as a recent research study
looks at depth, some firms would voluntarily publish their supply chain
relationships with "green" suppliers to to present a CSR image that
fails to represent the whole truth.
Titled Corporate Social Responsibility in Supply Chain: Green or
Greenwashing?, this research study is the first
to examine greenwashing behaviour of firms by looking at the voluntary
disclosure of their suppliers. It was co-conducted by Jing
Wu, Assistant Professor in the
Department of Decision Sciences and Managerial Economics at The Chinese
University of Hong Kong (CUHK) Business School, Yilin Shi, an incoming PhD
student at the CUHK Business School, and Prof. Yu Zhang at Peking University.
The researchers found greenwashing to be common in the more than 40 countries
who are the world's major economies. The team looked at around 7,600 public
manufacturing firms globally and observed over 12,000 unique firm-supplier-year
relationships from 2003 to 2017.
"It is just not enough for
firms to show the 'green' image of themselves to the world to demonstrate their
efforts in CSR. Our results show that firms now selectively reveal their
'green' suppliers to win customer trust," Prof. Wu says.
To gauge greenwashing behaviour, the
researchers first calculated a score for each of the companies in the sample
based on their environmental performance. They found consistent evidence that a
suppliers' environment score is positively related to how likely their partner
firm would disclose its supply chain relationship. Specifically, a
one-standard-deviation increase in a supplier's environment score would lead to
a 4.2 percent higher chance of being disclosed by their customer firm. In
addition, firms tend to not reveal their less eco-friendly suppliers.
To rule out the alternative
explanation that firms may have chosen to disclose their relationship with a
certain set of suppliers based on other favourable characteristics and that
these suppliers also happen to possess strong CSR credentials, the researchers
tested if firms displayed greenwashing behaviour more when their local weather
was abnormally hotter, an indicator of global warming.
"For example, people google
more about global warming in extremely hot days and even retail investors would
sell stocks of firms that produce more carbon emissions and buy stocks of more
eco-friendly firms," Prof. Wu explains. "The same goes for our study.
We think that if firms greenwash because they are concerned about their CSR
image, then such behaviour would be more prominent in extreme weather
Just as theorised, Prof. Wu and his
co-authors found that firms are significantly more likely to fake good CSR
image by greenwashing in extremely hot weather. "We also find that when
other environmental concerns trigger people's attention to climate warming,
such as wildfire outbreaks, local firms are also more likely to greenwash their
images," Prof. Wu adds.
Who Does Greenwashing?
In terms of firm size and market
share, the study found that small firms and those with less market share and
usually lower CSR scores are more likely to greenwash in presenting a good CSR
image. This is because unlike large firms, small firms may not have the
resources to invest in substantial CSR efforts and they may need to leverage
the power of their supplier's images. For firms facing intensive competition,
faking a green image without making real CSR efforts can be a convenient
strategy. When small firms are under competitive pressure, a good CSR image may
help them to stand out from their rivals.
Firms that are more concerned about
their public image and reputation are also more likely to conduct greenwashing.
In particular, firms that spend significantly more on advertising are found to
be more aggressive in supply chain greenwashing, as the strategic disclosure of
their "green" suppliers would help build a better CSR image.
The researchers also found that more
profit-hungry firms are likely to engage in supply chain greenwashing.
According to the study, firms seeking to chase a higher return on assets (ROA)
tend to hide their "brown" or less environmentally-friendly suppliers
to avoid being punished for having a low CSR affiliation. The same is true for
firms that are owned more by institutional investors. A firm with a good CSR
image is a profitable asset in investors' portfolios, and therefore firms might
want to maintain a positive image for institutional investors. On the other
hand, some institutional investors might not care about greenwashing at all as
long as it brings in profits.
The study highlights that if a
supplier has more institutional ownership, then a firm using this supplier is
more likely to selectively disclose the relationship based on the latter's
environmental performance. This is because a relationship with a supplier with
good CSR credentials and large institutional ownership will receive more public
attention, which would benefit the firm using this supplier in terms of
publicity and recognition.
"If the 'bright' side to CSR is
a world where firms are seeking to lower their carbon footprint, then what our
study shows is the 'dark' side and how smaller and weaker firms are using it to
greenwash their public image," Prof. Wu says.
Showing off a "green"
image is not the only benefit that the firms can get out of greenwashing. The
researchers found that sales in firms that disclose their suppliers with good
environment ratings increased when compared with sales of the firms that
disclose their "brown" suppliers. However, such an improvement in
sales was short-lived. Similarly, disclosing "green" suppliers could
have a positive effect on a firm's ROA, but the effect would diminish in the
Why is that? Prof. Wu explains that
the public can be slow in familiarising themselves with the manufacturing
process of products or the details of supply chains, so it is easy for firms to
lure people with their seemingly "green" efforts in the supply chain.
But, in the long run, the general public would realise that what the firms did
was a mere publicity stunt. Therefore, the boosted sales and ROA would not
"Everyone wants to drive a
Tesla, but not all of them know how the cars are made and where the parts come
from. If a manufacturer tells the public that they only work with eco-friendly
suppliers, then people might just fall for it," Prof. Wu says. "Just
like how retail customers are now increasingly sceptical of so-called 'green'
products, the public would become sophisticated enough to tell whether the
firms are dedicating real efforts in protecting the planet. It just takes
Prof. Wu and his co-authors point
out that there is a way to put a damper on firms' greenwashing behaviour. In
examining environment-related disclosure regulations around the world launched
between 2003 and 2016, they found that supply chain greenwashing typically
reduces after CSR reporting and disclosure regulations are tightened.
The researchers also say that since,
more often than not, environmental legislation tends to focus on the green
credentials of a company's own production and operations and pay less attention
to its suppliers, it can be easy for firms to hide environmentally polluting
production processes in complex supply chains.
To enhance the effectiveness of
regulations, they suggest countries expand their scope in requiring the
disclosure of suppliers. This way, firms would not be able to only disclose the
"green" suppliers and hide the bad ones. Policymakers should also
consider improving the transparency of supply chains in the current regulatory
framework and they should always beware of firms' strategic and selective
disclosure to boost a "green" image.
For managers, the researchers advise
them to bear in mind that higher profits, either in the form of sales or ROA,
brought about by greenwashing practices only last for a very short term. When
people find out that a firm engaged in greenwashing their CSR efforts and with
no actual interest in being socially responsible, then the short-term gains
would likely disappear.
"For investors, they should
make an effort to detect when strategic disclosure of 'green' suppliers purely
for CSR image purposes is happening, and realise that only truly greener supply
chains can improve firms' capital market valuation in the long term,"
Prof. Wu comments. "The public can also get in on the action and help out
by monitoring any suspicious supply chain greenwashing behaviour."
Shi, Yilin and Wu, Jing and Zhang, Yu, Corporate
Social Responsibility in Supply Chain: Green or Greenwashing? (July 25, 2020).
Available at SSRN: https://ssrn.com/abstract=3700310 or http://dx.doi.org/10.2139/ssrn.3700310
This article was first published in the China
Business Knowledge (CBK) website by CUHK Business School: https://bit.ly/3fFpu3S.
The issuer is solely responsible for the content of this announcement.