(Green)washing the trust: climate information and banking policies

Greenwashing, that is, the deceptive self-portrayal of companies as sustainable and environmentally friendly, is an increasingly relevant issue in finance. Identifying greenwashers is not a trivial task, given the difficulty of assessing firms' true environmental profiles, especially when relying on traditional data sources that generally overlook communication strategies and mass perceptions. Using granular credit data from the euro area banking system, we show that during the period 2019-2023, greenwashers, initially identified by combining information on firms' carbon emissions with an assessment of the reliability of their reporting, were able to borrow at lower interest rates than other companies. We then assess companies' environmental profiles by extracting textual information from newspapers and the internet. We find that sentiment scores based on firms' own websites are generally higher than those derived from newspapers, suggesting that companies use their communication channels to place greater emphasis on their sustainable image than is reflected in external sources. By integrating this textual metric with our initial proxy, we construct an alternative definition of greenwashing. Based on a sample of Italian firms, results obtained from this combined proxy are consistent with those derived from structured data alone. Finally, by introducing an unexpected contractionary monetary policy shock into our framework, we confirm the operation of the credit risk channel of monetary policy and find evidence of a reduction in the pricing benefits previously enjoyed by greenwashers.