Collateral Greenwashing Practices Worldwide: Green or Sustainable Bonds to Finance Green Innovation

Abstract

Amid accelerating climate risks, firms increasingly issue green bonds and the broader set of sustainable bonds to finance green innovation while signaling environmental credibility. This study examines whether these labeled debt instruments are associated with substantive environmental upgrading or primarily support symbolic narratives that may coexist with greenwashing. Using firm-year data from 2010 to 2022, we merge issuer information from the Luxembourg Green Exchange with ESG and financial indicators from LSEG Data and Analytics to test how green bonds and sustainable bonds relate to green product innovation, green process innovation, and a firm-level greenwashing index based on the substantive versus symbolic gap. Feasible GLS panel models with extensive controls and a matched-sample design via propensity score matching indicate that both green bonds and sustainable bonds are positively associated with green product innovation. Only sustainable bonds show a consistent positive association with green process innovation, aligning with the view that sustainability- and KPI-linked designs strengthen stakeholder and institutional pressures and translate them into operational change. Neither instrument is associated with an immediate reduction in greenwashing. Dynamic robustness analyses suggest that improvements emerge over medium to long horizons as verification cycles and organizational capabilities mature. Overall, the findings highlight that instrument design and time dynamics matter. Labeling alone is insufficient to curb opportunism, but well-governed sustainable finance can help scale innovation and, over time, reduce the space for greenwashing.