What’s the Real Cost of Greenwashing? A New Model Puts a Number on It
For years, we’ve known that greenwashing is a problem — but how big a problem, exactly? Is it mostly about misleading claims and reputational risk? Or does it affect markets at a systemic level, dragging down the very infrastructure we rely on to allocate capital?
A remarkable new paper from Markus Leippold, Chiara Colesanti Senni, and Ario Saeid Vaghefi (University of Zurich) offers a clear answer: greenwashing isn’t just noise — it’s a macroeconomic risk. According to their model, the Social Cost of Greenwashing (SCG) could exceed 2% of GDP annually, making it one of the largest hidden economic costs we rarely quantify.
The title of the paper is technical — The Social Cost of Greenwashing — but the message is straightforward: when trust in sustainability information erodes, everyone pays.
So what exactly did they do?
The authors built a dynamic model where two critical factors — information quality and public trust — can rise or fall over time. These aren’t treated as background noise. They’re central variables in the system, influenced directly by corporate behaviour and policy choices.
The model imagines a market with two types of firms: one using genuinely green technologies, and another using brown (polluting) ones. The brown firm can choose how much to spend on “greenwashing” — meaning lobbying, PR, or data manipulation aimed at making its environmental performance look better than it really is.
Here’s the key twist: when greenwashing succeeds, it doesn’t just mislead consumers and investors temporarily. It degrades the overall information environment — making future manipulation even easier. This creates what the authors call a self-reinforcing trap, where bad information leads to worse decisions, which leads to more bad information.
Why this matters: 2% of GDP isn’t small
The Social Cost of Greenwashing, as defined in the paper, includes:
Misallocation of capital (e.g., funds flowing to brown firms that appear green)
Wasteful influence spending (on PR, lobbying, etc.)
Long-term damage to the information infrastructure (i.e., the erosion of trust and data integrity)
Combined, these costs add up to more than 2% of GDP each year — in conservative scenarios.
To put that in perspective:
That’s roughly comparable to the direct costs of climate change in some models.
It’s bigger than most countries’ education or public health budgets.
And it’s largely invisible in conventional economic analysis.
The authors are careful to note that this is a lower bound — their assumptions are deliberately cautious. Which raises a bigger question: What is the real upper limit of the SCG in more aggressive greenwashing scenarios? And do we currently have any policy tools that even try to measure or track it?
Two unsettling findings
Beyond the headline number, the model delivers two results that should concern policymakers, investors, and sustainable finance practitioners alike.
Markets don’t bounce back on their own
One of the most important features of the model is hysteresis — meaning once trust and information quality degrade, they don’t naturally revert back. Even if a firm stops greenwashing, the damage lingers. Rebuilding trust takes time, effort, and resources — often more than what it would have cost to prevent the damage in the first place.
This aligns with what we see in real life: after major scandals (e.g., Dieselgate), public confidence in sustainability claims doesn’t just return the next quarter. It takes years — and even then, scepticism may become the default stance.
The implication is clear: prevention is far cheaper than cure.
More competition can make things worse
This one may seem counterintuitive. We’re used to thinking of competition as a force for good — especially in ESG markets, where more firms vying for sustainability-linked capital should, in theory, improve outcomes.
But the model reveals a “competition paradox.” When firms treat influence as a strategic asset — meaning when green firms try to “out-message” brown firms and vice versa — the result is an arms race of messaging, not a race to the top in sustainability.
The total amount spent on manipulation (or counter-manipulation) increases. But the net quality of information — and public trust — may still decline. The green firms end up spending defensively, not productively.
This echoes dynamics we’ve seen in sectors like political advertising or misinformation: once manipulation becomes the cost of playing the game, everyone plays — and the collective outcome is worse.
Why SWISOX is paying attention
At SWISOX, we’ve been asked many times — why build a marketplace only for sustainable companies? Isn’t that exclusionary? Shouldn’t we be working to raise standards across the board?
This paper helps explain why our approach matters. When greenwashing causes structural damage to information markets, the best response is not more labels — it’s to build a separate, high-trust channel where only genuinely sustainable companies can enter.
No ambiguity about criteria (we use science-based taxonomies).
No passive fund leakage into greenwashed portfolios.
No incentives to “signal” sustainability without delivering it.
A functioning market needs both clarity and credibility. Without them, even well-intentioned capital misfires. As this paper shows, we’re not just talking about reputational harm — we’re talking about GDP-scale damage.
Final thoughts
Leippold and his co-authors have done something rare: they’ve created a framework that makes the macroeconomic case for tackling greenwashing head-on. This isn’t about moral outrage or branding. It’s about protecting the basic functioning of capital markets.
The idea of an “information commons” degraded by private manipulation is not new. But quantifying it — and showing how it interacts with technology adoption, trust dynamics, and investor behaviour — is a major step forward.
It’s now up to regulators, index providers, and market infrastructure builders (like us) to ask:
Are we doing enough to preserve the quality of sustainability information?
Can we price greenwashing as an externality — just as we try to price carbon?
And what does a post-greenwashing finance system look like?
If we can’t answer those questions yet, we should at least be building the tools that let us try.
Paper: The Social Cost of Greenwashing (SSRN, Sept 2025)
Authors: Markus Leippold, Chiara Colesanti Senni, Ario Saeid Vaghefi — University of Zurich
