From green claims to market crashes: the moderating forces of climate risk

PurposeFrom the perspective of the environmental, social and governance (ESG) mechanism, this study aims to investigate the impact of greenwashing reporting on stock price crash risk (SPCR). Further, we investigate the moderating role of climate risk on this relationship.Design/methodology/approachUsing public companies listed on the Indonesia Stock Exchange from 2019 to 2023, the dataset includes 247 firm-year observations. We conduct an ordinary least squares approach, followed by coarsened exact matching and generalized least squares for the robustness test.FindingsWe find that greenwashing moderately affects SPCR, suggesting that companies that amplify their environmental claims are more susceptible to market crashes. The moderating analysis indicates the imperative role of climate risk, implying that greenwashing practices under high climate risk circumstances lead to a higher risk of stock price crashes. Overall, our evidence is consistent with the masking effect of socially responsible information and that ESG greenwashing increases SPCR, which is beneficial for market participants and policymakers by providing a reliable decision-making reference for the high-quality development of Indonesia-listed companies.Research limitations/implicationsDespite the regression results, this study has its own limitation: due to the missing data of some companies when sample selection, greenwashing index cannot be calculated correctly, as it focuses on companies that have both ESG performance and disclosure, which may not fully capture the real greenwashing effect on SPCR. As a result, this paper omits samples with missing data, which affects the overall findings by limiting its ability to fully capture the real impact of greenwashing on SPCR in Indonesia, thereby leaving several shortcomings for future investigation.Practical implicationsThe practical implications are twofold. For policymakers, the results highlight the urgency of strengthening ESG reporting standards in Indonesia, moving beyond voluntary disclosure to frameworks aligned with global initiatives such as the EU CSRD or US Securities and Exchange Commission rules. For investors, the evidence suggests caution in interpreting ESG claims at face value and the importance of integrating ESG quality assessments and active engagement into portfolio strategies. In this way, both regulators and investors can reduce information asymmetry and limit systemic risks arising from greenwashing.Social implicationsThe study highlights that misleading sustainability reporting not only threatens financial market stability but also erodes public trust in corporate ESG practices. By exposing the risks of greenwashing, the findings encourage greater transparency and accountability, which can foster more responsible corporate behavior and protect broader societal interests in sustainable development.Originality/valueWe contribute to the literature's discussion on the greenwashing and market crash risk nexus, which is still rarely found in the context of emerging economies. Furthermore, the inclusion of climate risk provides more insightful information for market participants.