Firms that ‘aggressively’ avoid paying tax are also more likely to overstate their environmental credentials, a new study by Murdoch University has suggested.
The Australia-based study, which examined tax liability and ESG data from 391 companies listed on the Australian Securities Exchange (ASX) between 2019 and 2022 – a period impacted by the COVID-19 pandemic – found that firms that adopted tax avoidance strategies were more likely to engage in greenwashing.
Image over action
“The aim of our research was to understand whether these pressures encourage some companies to rely on image rather than actually taking genuine action to improve their environmental performance,” commented Dr Augustine Donkor, Murdoch Business School and lead author of the study.
“The goal was to better understand the conditions under which greenwashing is more likely to occur, so that regulators, investors and companies themselves can design systems that encourage genuine sustainability and greater transparency.
“This is particularly important now as investors, consumers, and regulators increasingly rely on sustainability information when making decisions, so ensuring that information is trustworthy is critical.”
As the study found, firms that engaged in more aggressive tax avoidance were likely to overstate their green credentials as a means to bolster their public image during periods of economic uncertainty.
‘Defender’ strategy
The connection between tax avoidance and greenwashing was strongest among businesses following what the researchers describe as a ‘defender’ strategy – in other words, those that focused on efficiency, cost control, stability and maintaining an established market position.
“We expected companies with more aggressive growth strategies to be more likely to engage in these behaviours,” Donkor added.
“Instead, the results suggest that when defender firms see greenwashing as a relatively low-cost way to manage their reputation, they may also be more willing to engage in aggressive tax strategies during periods of financial stress.”
Donkor added that the findings highlight the need for greater transparency and stronger scrutiny of both sustainability reporting and corporate tax practices – for policymakers, he noted, this could “support more rigorous reporting standards and better verification of environmental and corporate social responsibility claims”.
The study, entitled Surviving Strategy: The Tax Avoidance – Greenwashing Nexus and the Moderating Role of Business Strategy, was published in the journal Business Strategy and Development. Read more here.
