Unveiling the dark side of sustainability: Are banks’ ESG misrepresentations truly worthwhile?∗

By analyzing a sample of US and European listed banks over the years 2015–2022, we investigate the relationship between greenwashing behavior and systemic risk. To do that, we use a measure of greenwashing that considers the consistency of what banks disclose with what they actually do to address ESG-related issues. We find that engaging in greenwashing practices contributes to undermining financial stability, with a rise in systemic risk which is exacerbated for less efficient and larger banks. Market seems to acknowledge a superior informative value to banks’ actual ESG performance, giving less importance to what they disclose. Finally, a better performance in each of the environmental, social and governance dimensions reduces systemic risk, but only a bank’s commitment in addressing environment related issues seems to moderate the contribution of greenwashing to financial system fragility.