Initiative in Sustainable Finance: The Social Cost of Greenwashing
Research Highlight by Markus Leippold, Chiara Colesanti Senni and Ario Saeid Vaghefi
This recent scientific paper by Prof. Markus Leippold, Dr. Chiara Colesanti Senni and Dr. Ario Saeid Vaghefi from our UZH Department of Finance quantifies the Social Cost of Greenwashing (SCG) and finds it could exceed 2% of GDP annually.
Research Question
The paper addresses a critical market failure in climate transitions: despite renewable energy costs plummeting by 69-89% between 2010-2022, fossil fuels maintained 80-82% of global energy supply.
The authors investigate how strategic corporate greenwashing creates self-reinforcing "information traps" that prevent efficient energy transitions, introducing the concept of Social Cost of Greenwashing (SCG) as a welfare metric comparable to carbon pricing.
Methodology
The research employs a dynamic partial equilibrium model with two endogenous state variables: information quality (ξt) and consumer trust (Tt).
The methodology integrates insights from information economics, behavioral finance, and environmental economics. Key features include strategic manipulation by "brown" firms, consumer ambiguity aversion, and asymmetric information degradation (misinformation spreads faster than truth). The model analyzes monopoly, duopoly, and strategic competition scenarios through calibration and simulation.
Key Findings
The study establishes three principal results:
- First, information markets exhibit pronounced hysteresis - temporary manipulation campaigns create persistent technological lock-in with restoration costs exceeding prevention by an order of magnitude.
- Second, competition paradoxically reduces welfare when influence activities are strategic complements, degrading information commons faster than monopolistic manipulation.
- Third, conservative calibration yields annual SCG exceeding 2% of GDP, with 75% from misallocation/influence costs and 25% from systemic information capital erosion.
Implications and Conclusions
The findings demonstrate that protecting information integrity represents a first-order policy instrument comparable to carbon pricing.
The research reveals why market forces alone fail to correct information environments and suggests that traditional competition policy can backfire in information markets.
The authors propose three strategic levers for recovery: solving green coalition problems, rebuilding trust through verification, and igniting virtuous cycles through market tipping points. Prevention dominates cure due to trust reconstruction frictions.
More Information:
Leippold, Markus and Colesanti Senni, Chiara and Vaghefi, Saeid, The Social Cost of Greenwashing (September 14, 2025). HKU Jockey Club Enterprise Sustainability Global Research Institute Paper No. 2025/150, Available at SSRN: https://ssrn.com/abstract=5483808 or http://dx.doi.org/10.2139/ssrn.5483808
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Additional Information
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