Green Gatekeepers

Products are routinely labeled “carbon neutral,” “recycled,” “biodegradable,” “ocean-friendly,” and “sustainable.” Bonds are marketed as “green” and mutual funds as “ESG,” while firms may pledge to become “net zero.” But are statements concerning environmental qualities reliable? It is often hard for consumers and investors to tell. Environmental qualities tend to have credence attributes; they cannot be verified even after consumption. Green gatekeepers constitute an increasingly important response to this problem. Occasionally required by law but more often enlisted voluntarily by firms, green gatekeepers certify claims made about the green qualities of products or firms, promising to significantly mitigate information asymmetries between firms and certification users. After distinguishing green gatekeepers from highly reputation-sensitive traditional gatekeepers in financial markets, we argue that green gatekeepers face weaker reputational constraints than traditional ones. Consequently, they are more likely to issue inaccurate certifications. We hand-code data on over 450 green gatekeepers, and we show that many of these gatekeepers are opaque, as in many instances they do not even disclose the standards they follow. We then propose a framework for regulation based on a classification that allows us, first, to identify which green gatekeepers are unlikely to be adequately constrained by reputational mechanisms and, second, to discern instances in which policymakers might be able to craft appropriate regulatory responses. From this framework, we derive several policy strategies and explore how they may apply to a sample of prominent green gatekeepers.