Greenwashing and bank credit risk: Fresh evidence on the role of board diversity across euro area banks

The literature documents that greenwashing enhances the likelihood of failure of banks to disclose sustainable profiles for their products with clarity. In that sense, they seem like deceiving their clientele basis and deteriorate the entire financial system. Given the sustainability legislation in the European Union, the goal of this study is to assess the influence of greenwashing on bank risk by explicitly highlighting the intermediate role of diversity characteristics of their board of directors. The analysis uses panel econometric methods, such as panel unit roots and GMM regressions, while it employs European-listed banks, spanning the period 2010-2020. The results illustrate that greenwashing negatively impacts bank risk, with female directors, PhD holders, and Chairs/CEOs moderating this relation. The findings survive certain robustness checks, such as the application of a different measure for bank risk, alternative measures of gender diversity, inclusion of ESG information, bank size differences, and country geographical differentiation. The work adds to the strand of literature which considers the role of greenwashing in financial entities’ performance in terms of both profitability and risk. The work also offers important implications for banks, for policymakers, and regulators.