The Effect of Greenwashing Practices on Corporate Financial Performance: The Moderating Role of ESG Performance

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Malang— Strong ESG Can “Buffer” the Financial Impact of Greenwashing in Indonesian Mining Firms. Research conducted by Dinda Rahmahani Aisyah, Diana Tien Irafahmi, and Sri Pujiningsih from Malang State University, published in January 2026 in the International Journal of Management Analytics (IJMA).

The research conducted by Dinda Rahmahani Aisyah, Diana Tien Irafahmi, and Sri Pujiningsih is important because the mining, energy, and raw materials sector is one of the sectors with the highest ecological impact, but it is also the most active in building a “green” narrative to maintain its public image.

This study specifically examines the relationship between greenwashing, corporate financial performance, and the role of ESG (Environmental, Social, Governance) as factors that can strengthen or weaken its impact.

Growing Pressure for Sustainability, Growing Risk of Greenwashing

Over the last two decades, global initiatives such as the Paris Agreement and the Sustainable Development Goals (SDGs) have pushed companies worldwide to strengthen sustainability commitments. As a result, environmentally friendly branding has become a common business strategy.

However, the same trend has also increased greenwashing. In the study, greenwashing is described as the use of exaggerated or misleading environmental claims to gain public legitimacy. The authors highlight that this phenomenon is particularly visible in Indonesia’s extractive industries, where environmental impact is high but sustainability messaging is increasingly polished.

The researchers point out that Indonesia’s mining downstreaming policies, introduced since 2020, have increased reputational pressure on extractive companies. But in many cases, reputational pressure has not been matched by strong environmental practice, leaving room for greenwashing to grow.

What the Study Examined

The research focused on three main questions:

Does greenwashing influence corporate financial performance?
Does ESG performance moderate the relationship between greenwashing and profitability?
Does firm size (measured through market capitalization) affect financial performance?

To explain the corporate behavior behind greenwashing, the authors used Legitimacy Theory. This theory suggests that companies rely on public acceptance to maintain operations. When legitimacy is threatened, firms may use symbolic actions—such as greenwashing—to restore credibility.

Data: 40 Public Companies on the Indonesia Stock Exchange

The study used quantitative methods with secondary data from:

annual reports,
sustainability reports,
stock market summaries.

The sample included 40 mining, energy, and basic materials companies listed on the Indonesia Stock Exchange (IDX) from 2021 to 2024. With four years of observations, the dataset totaled 160 firm-year records.

How Greenwashing, ESG, and Financial Performance Were Measured

To make the analysis measurable, the authors used several clear indicators:

Greenwashing was measured using a Greenwashing Index (GWI) based on the gap between green communication and green practice, derived through content analysis.
Financial performance was measured using ROA (Return on Assets).
ESG performance was measured using PROPER ratings, a widely recognized environmental compliance rating system in Indonesia.
Market capitalization was used as a control variable representing firm size.

The data were analyzed using multiple linear regression and Moderated Regression Analysis (MRA) to test ESG’s moderating role.

Key Findings: Greenwashing Was Widespread, but Not Always Financially Punished

The descriptive results revealed that greenwashing practices were dominant across the sample.

Using the classification referenced in the study, most companies fell into:

Greenwashing category: 109 companies
Silent green: 45 companies
Vocal green: 5 companies
Silent brown: 1 company

This suggests that many firms invest heavily in green communication while doing less in terms of substantial green practices.

The descriptive statistics also showed:

· average greenwashing score: 0.09174

· average ROA: 9.02639

· average PROPER rating: 3.47 (scale 2–5)

· average market capitalization: IDR 19.9 trillion

Regression Results: Greenwashing Was Negative, but Not Significant in the Base Model

In the standard multiple regression model, greenwashing showed a negative relationship with ROA but was not statistically significant.Greenwashing’s significance level was 0.180, higher than the 0.05 threshold. This means the base model did not provide strong enough evidence to conclude that greenwashing directly affects profitability. In the same model, ESG performance also did not significantly affect ROA.However, one factor clearly stood out: market capitalization.Market capitalization had a positive and significant relationship with financial performance (significance value 0.003), indicating that firm size was a strong driver of profitability.

ESG Became Crucial When Tested as a Moderator

The results changed when ESG was introduced as a moderating variable through the interaction term Greenwashing × ESG.

In the MRA model:

greenwashing became significantly negative (sig 0.021)
market capitalization remained significantly positive (sig 0.001)
the interaction variable (greenwashing × ESG) was significant (sig 0.046)

This confirms that ESG significantly moderates the relationship between greenwashing and financial performance.

The researchers conclude that:

greenwashing tends to reduce financial performance,
but strong ESG performance can weaken (buffer) that negative effect.

In simple terms:
Companies with stronger ESG implementation appear more capable of maintaining financial stability, even when their sustainability communication contains symbolic elements.

Why Greenwashing Does Not Always Immediately Hurt Profitability

The authors argue that greenwashing may not produce an immediate financial penalty because:

stakeholders may have limited ability to detect greenwashing,
enforcement of sustainability-related regulations may still be weak,
greenwashing can provide short-term reputational benefits.

Still, the negative direction of the relationship supports Legitimacy Theory, which predicts that misleading symbolic actions may eventually create reputational risk and loss of trust.

Practical Implications for Business, Investors, and Regulators

The study delivers important insights for multiple stakeholders.

1. For companies

The findings suggest companies should prioritize real sustainability action rather than relying on green communication. Symbolic disclosure may work temporarily, but long-term legitimacy depends on substance.

2. For regulators

The authors recommend stronger sustainability reporting guidelines and monitoring systems to reduce the space for greenwashing.

3. For investors

Investors are encouraged to go beyond surface-level green claims and evaluate ESG quality more carefully, because ESG strength plays a measurable role in shaping financial outcomes.

A Consistent Finding: Firm Size Still Matters Most

One of the strongest and most consistent results was the positive role of market capitalization.

Larger firms tend to perform better financially due to:

greater operational scale,
stronger access to capital,
higher investor visibility,
stronger capacity to manage sustainability risks.

This finding also implies that large firms may be better positioned to absorb reputational pressure related to sustainability controversies.

Author Profiles

Dinda Rahmahani Aisyah - Universitas Negeri Malang
Diana Tien Irafahmi - Universitas Negeri Malang
Sri Pujiningsih - Universitas Negeri Malang

Research Source

Dinda, Diana, Sri “The Effect of Greenwashing Practices on Corporate Financial Performance: The Moderating Role of ESG Performance” International Journal of Management Analytics (IJMA) Vol. 4 No. 1 (Januari 2026), halaman 35–44
DOI:https://doi.org/10.59890/ijma.v4i1.222

URL resmi: https://dmimultitechpublisher.my.id/index.php/ijma