In today’s markets, being sustainable is no longer a bonus. It is a distinguishing feature that attracts investors, secures customers, and strengthens brands. From packaging that boasts eco-friendly labels to glossy reports filled with sustainability pledges, companies are eager to showcase their green credentials. Yet behind the shine often lies a troubling truth. Many firms are not as sustainable as they claim to be. They are simply greenwashing: appearing environmentally responsible without carrying the real cost or responsibility of becoming so.
As pressure on firms to produce profits increased, this practice has become more common, more sophisticated, and harder to detect. Firms rely on vague commitments, future promises, and unauthentic certifications that look convincing but deliver little. The result is a growing sense of mistrust. Consumers struggle to know who is genuine and who is faking. Investors hesitate, regulators tighten their grip, and the credibility of the entire sustainability movement is put at risk. As such, the question is why do firms take the risk to greenwash and what can we do to ensure that companies are eco-friendly?
The Business Debacle
According to recently published research by Sebastian Ille, associate professor of Economics at Onsi Sawiris School of Business and Edgar J. Sanchez Carrera of the University of Florence, the decision of firms to greenwash is less about values and more about incentives. Their study shows that every firm faces a strategic choice. Do they invest in real green technologies, stick with traditional brown production, or try to mimic green behavior and hope no one notices?
The answer, in most cases, depends on costs and rewards. If rewards outweigh the cost, firms may choose to produce environmentally friendly or to greenwash.It all depends on a firm’s ability to hide their mode of production. As more firms choose to greenwash, honest firms face more competition and pressure to do the same. Simultaneously, firms are under higher scrutiny if greenwashing becomes more prevalent in a sector. A company is then torn between increasing risks and higher market pressure.
If the costs outweigh the benefits, the situation is not easier: since the cost of production is path-dependent, the longer a firm produces in an environmentally friendly manner, the cheaper it becomes. A firm then has to choose between being an early adopter who initially faces higher costs but can benefit from higher reductions in the long run or to greenwash which boosts initial profits but locks the firm in a mode of production which will eventually be no longer competitive.
The Limits of Punishment
For regulators and policymakers, the instinctive response has been to increase penalties. Make greenwashing costly enough, and firms will think twice before faking green production. The study shows, however, that punishment alone is not enough. Longer penalties or stricter fines may reduce greenwashing, but they often fail to encourage genuine investment in green production. In some cases, they even push firms back toward brown practices. What matters most is not only raising the risks of deception but also improving the rewards of authenticity. Similarly, boosting the benefits of environmentally friendly production on its own may only encourage greenwashing, but fails to incentivize firms to produce green.
The Power of Real Incentives
The research reveals a more effective path. When the upfront costs of green investment are reduced or firms benefit from strongly path-dependent costs, firms shift away from greenwashing and into genuine sustainability. Subsidies, tax breaks, and research support can lower the financial barriers that often prevent firms from making the leap and also drastically reduce the cost of green production over time. At the same time, policies that make deception harder, such as verified environmental disclosures and transparent reporting standards, cut off the shortcuts that greenwashers rely on.
There is also a social dimension. Firms do not act in isolation. They are influenced by their peers, their competitors, and their partners. The study finds that when companies operate in clusters, whether industry coalitions or supply chain networks, authentic green practices are more likely to spread. Greenwashing, on the other hand, becomes riskier in such environments because scrutiny is higher and peer pressure is stronger.
The Final Word: Authenticity Wins
Greenwashing may seem like a quick win, but it carries long-term costs. Trust, once lost, is difficult to regain. Investors and consumers are increasingly able to spot the difference between appearance and action. Those who rely on greenwashing are building on shaky ground.
Authentic sustainability, while costly at first, builds credibility that endures. It attracts investors, strengthens customer loyalty, and prepares firms for stricter regulations ahead. In a world where climate risks and consumer scrutiny are only rising, the future belongs to the businesses that do the hard work of change, not those that merely paint themselves green.
