Introduction

The concept of aligning social and environmental objectives with corporate and financial conduct has evolved significantly over several decades. Driven by shareholder activism, participatory democracy, and stakeholder engagement, Environmental, Social, and Governance (ESG) considerations now exert a substantial influence on capital markets. Historically, Corporate Social Responsibility (CSR) campaigns and pro-environmental investments were triggered by catastrophes and activism, leading to the United Nations launching Responsible Investment principles in the early 2000s. Today, policymakers have introduced mandatory disclosure requirements to track voluntary prosocial conduct, moving from reducing information asymmetries to using disclosures as an instrument of soft coercion. This report examines the divergence between US and European disclosure models and the resulting enforcement gap.

Social considerations in markets: Corporate social responsibility (CSR)

CSR advocates for integrating ethics and sustainability into market behaviour, with roots extending to religious foundations. In modern times, it has flourished during crises, fostering corporate accountability through codes of conduct that reflect societal moral convictions. Shared social responsibility is viewed as a competitive advantage that attracts a favourable workforce seeking gratification beyond monetary remuneration. Historically, CSR was subject to managerial discretion, but it has transformed into a portfolio-level commitment by the world’s largest asset managers. On the investment side, Socially Responsible Investment (SRI) aligns financial returns with values. However, a significant issue remains: ESG ratings often disagree, with leading agencies exhibiting a pairwise correlation of only about 0.54.

The legal enshrinement of sustainability disclosures

A global trend has shifted from directly mandating conduct to requiring disclosures, primarily because defining prosocial conduct legally is challenging. In the United States, the Securities and Exchange Commission (SEC) adopted climate-related disclosure rules in March 2024 but stayed them pending litigation. By March 2025, the SEC voted to end its defence of these rules, and in May 2026, it proposed to rescind them entirely. Conversely, California is implementing the Climate Corporate Data Accountability Act and the Climate-Related Financial Risk Act, which require disclosures of Scope 1, 2, and 3 emissions. The European Union (EU) remains a leader with the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). However, the Omnibus I Directive, entered into force in March 2026, substantially narrowed the scope to firms with more than 1,000 employees and €450 million in net turnover, potentially removing more than 80 percent of companies from the CSRD’s original scope.

Greenwashing

Greenwashing involves disseminating misleading or deceptive information about environmentally responsible conduct to disguise less desirable practices. Techniques include manipulating expense timing, cosmetic report adjustments, and using vague terms like ‘eco-friendly’. European Commission screenings found that 42% of environmental claims reviewed were potentially deceptive. While often viewed as fraudulent, ‘greenwishing’ can also be aspirational, where firms commit to goals they genuinely intend to pursue but currently lack the capacity to deliver. From a capital markets perspective, this creates information asymmetries that distort investment decisions and misallocate capital. Furthermore, a substantial enforcement gap exists due to the difficulty of private litigation and the limitations of financial materiality constraints in both the US and EU.

Is greenwashing actually a problem?

Despite the legal and ethical risks, greenwashing may perform constructive functions. The concept of impact materiality in EU law suggests that aspirational disclosures can serve a constructive role by encouraging firms to develop transition plans and commit to credible trajectories. This ‘civilising function of hypocrisy’ can shape consumer expectations and attract a workforce oriented towards ethical ideals, which may eventually change corporate culture from within. Furthermore, greenwashing scandals can trigger the ‘bomb crater effect’, where publicised enforcement actions extend psychological influence beyond the implicated firm, eliciting greater accountability and institutional reform. If met with public scrutiny and outcry, greenwashing holds the potential to lift entire industries to higher environmental standards over time.

Conclusion

While greenwashing is typically portrayed as a challenge to the integrity of sustainable capitalism, it may hold utility as a transitional mechanism. It acts as a rhetorical bridge between unsustainable practices and emerging norms of stewardship. Ultimately, the challenge for policymakers and investors is to transform sustainability from a narrative of virtue into a system of verifiable practice. If successful, greenwashing will have served a historical function as the imperfect messenger that ushered capitalism into a new era of ecological and ethical attention.