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The Psychology of Greenwashing and Investor Perception

In: Following the Crowd: Psychological Drivers of Herding and Market Overreaction

Author

Listed:
  • Kok Loang Ooi

    (Universiti Malaysia)

  • Norazlin Binti Ab Aziz

    (Universiti Malaysia)

  • Wee Yeap Lau

    (Universiti Malaysia)

Abstract

This chapter investigates the psychological mechanisms and investor responses that underlie the persistent challenge of greenwashing within the evolving domain of environmental, social, and governance (ESG) finance. It examines how ESG disclosures, often used by corporations to create a misleading impression of sustainability, influence investor perception and capital allocation. A central concern is the extent to which behavioural misjudgements, driven by cognitive biases such as confirmation bias, the halo effect, and framing distortions, impair rational investors’ interpretation of corporate sustainability narratives. The chapter scrutinises how different classes of investors, including retail, institutional, and algorithmic actors, react to ESG disclosures in both efficient and irrational ways, revealing systemic underreaction or overreaction tendencies that contradict market efficiency assumptions. Drawing on empirical finance literature and behavioural economics, the analysis highlights how disclosure tone, media salience, and narrative consistency serve as psychological triggers that modulate investor trust and enthusiasm.

Suggested Citation

  • Kok Loang Ooi & Norazlin Binti Ab Aziz & Wee Yeap Lau, 2025. "The Psychology of Greenwashing and Investor Perception," Springer Books, in: Following the Crowd: Psychological Drivers of Herding and Market Overreaction, chapter 0, pages 199-208, Springer.
    • Handle: RePEc:spr:sprchp:978-981-95-0792-4_15
    DOI: 10.1007/978-981-95-0792-4_15
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