Does the business environment inhibit or promote corporate greenwashing? Empirical evidence from China

The rise of green consumption has not only encouraged businesses to take on more environmental responsibility but has also incentivized greenwashing behaviors in some firms. Given that current research on greenwashing mechanisms mainly focuses on internal factors, this study seeks to redirect the focus to external factors, specifically the business environment. Using a dataset from A-share listed companies across 31 provinces and cities from 2011 to 2020, we employ a fixed effects model to examine the impact of regional business environment quality on corporate greenwashing, with financing constraints, knowledge breadth, and enterprise innovation as mediating factors. The findings indicate that a higher business environment index correlates with a lower likelihood of greenwashing. This conclusion holds true even after addressing endogeneity issues and conducting robustness tests. Building upon the fraud triangle theory, this study further analyzes how the business environment influences corporate greenwashing. The results of the mediation analysis suggest that optimizing the business environment can suppress greenwashing by alleviating financing constraints, broadening knowledge breadth, and enhancing enterprise innovation capacities. This study offers both theoretical and practical implications to limit greenwashing and enhance environmental, social, and governance (ESG) performance from an external perspective.