Greenwashing and executive compensation: what is the link? Evidence from banks

Purpose Executive compensation policy is increasingly linked to environmental, social and governance (ESG) performance. This study analyses the relationship between banks’ ESG-linked compensation policy adoption and their propensity to “greenwash” by disclosing misleading ESG information. Design/methodology/approach Using panel data of worldwide banks from 2013 to 2023, a fixed-effects regression model has been employed to test the impact of ESG-linked executive compensation on the greenwashing behaviour, calculated as the difference between the quantity of ESG data disclosed and ESG performance. Findings Results show a negative and significant relationship between the introduction of an ESG-linked compensation policy and greenwashing. Findings are robust to controlling for executive member features, financial measures and alternative ESG-linked compensation measures. Originality/value The introduction of sustainability-based compensation and its relationship with greenwashing behaviours is unexplored. This paper fills this gap, providing relevant insight for the banking industry. Prior literature on greenwashing mainly focuses on corporate firms. However, financial institutions are crucial for sustainability goals and regulatory pressure for new compensation policy makes banks extremely relevant to the aim of this study.