The price of carbonwashing : market responses to carbon disclosure controversies

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El Alfy, Amr and Nassar, Mohamed and Quigley, John and Tang, Leilei (2026) The price of carbonwashing : market responses to carbon disclosure controversies. EuroMed Journal of Business. ISSN 1450-2194 (In Press)

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Abstract

Purpose:  This study examines whether capital markets penalize firms for carbonwashing-related controversies and under what conditions such penalties occur. Specifically, it investigates how the visibility of carbonwashing incidents influences investor reactions to misleading or selective corporate disclosure of greenhouse gas (GHG) emissions. Design/methodology/approach:  Using a dataset of climate-related controversies identified by RepRisk, the study analyzes short-term stock market reactions for S&P 500 firms over the period 2010–2023. A standard market-model event study is employed to estimate cumulative abnormal returns (CARs) over a [−2,+2] event window. The analysis is complemented by non-parametric tests and panel regressions with firm and time fixed effects. Grounded in signaling theory, corporate climate disclosures are conceptualized as signals of environmental commitment, while carbonwashing incidents are treated as negative signals that undermine signal credibility. Findings: The results show that capital markets do not uniformly penalize climate-related controversies. Negative stock price reactions are concentrated in carbonwashing incidents that receive substantial media attention. High-visibility GHG-related controversies are associated with significantly lower cumulative abnormal returns and greater downside risk, whereas low-visibility incidents generate muted market responses. These findings suggest that carbonwashing becomes financially material primarily when negative signals are widely disseminated and perceived as credible by investors. Although the analysis focuses on U.S.-listed S&P 500 firms, the findings establish a baseline for how large-cap markets price carbonwashing. They also point to the European regulatory environment, particularly the mandatory assurance provisions under the Corporate Sustainability Reporting Directive (CSRD), as a natural setting for cross-jurisdictional replication, where stricter frameworks increase both the visibility and financial materiality of carbon disclosure practices. Research limitations/implications: The analysis focuses on short-term market reactions and relies on controversies identified in the RepRisk database, which may not capture all instances of misleading climate disclosure. Nevertheless, the findings highlight the importance of transparency and signal credibility in climate-related corporate communication. They also suggest that investor responses depend strongly on the information environment surrounding sustainability controversies. These implications are especially salient for European firms operating under enhanced disclosure and assurance requirements, where credibility risks are likely to be more tightly scrutinized. Originality/value: This study contributes to the sustainability and corporate strategy literature by showing that the financial consequences of carbonwashing depend on the visibility and credibility of negative signals rather than the mere existence of misleading climate communication. The results provide insights for managers, investors, and policymakers seeking to strengthen the credibility of climate disclosure in capital markets.

ORCID iDs

El Alfy, Amr, Nassar, Mohamed, Quigley, John ORCID logoORCID: https://orcid.org/0000-0002-7253-8470 and Tang, Leilei ORCID logoORCID: https://orcid.org/0000-0003-0422-9892;
CORE (COnnecting REpositories)