Greenwashing Versus Genuine Green: An Evolutionary Game of Corporate Strategy, Investor Trust, and ESG Regulation

Abstract

The rapid growth of environmental, social, and governance (ESG) investment has not only accelerated corporate sustainability transitions but has also contributed to the prevalence of greenwashing. In such instances, firms disseminate misleading information to align with market preferences, thereby undermining market efficiency and eroding trust. This study develops an evolutionary game-theoretic model to examine the dynamic interactions between corporations and institutional investors. The results indicate that, in the absence of regulatory intervention, markets tend to reach suboptimal outcomes. Specifically, they may converge to an equilibrium characterized by low investor trust and elevated greenwashing risk, or exhibit cyclical patterns in which periods of increased trust are followed by greenwashing crises. Further analysis underscores the critical role of regulatory intervention in steering the market toward an optimal equilibrium, where corporations undertake substantive improvements and gain investor trust. The effectiveness of regulation is found to be contingent upon its intensity; regulation that is too weak lacks impact, while overly stringent measures may suppress market dynamism. Importantly, higher corporate profitability broadens the range within which regulation is effective. Within this optimal regulatory range, the long-term welfare of both corporations and investors can be enhanced, resulting in mutually beneficial outcomes. This study provides new insights into strategic choice dynamics, trust evolution, and regulatory intervention in ESG markets and offers theoretical guidance for regulatory policy design and decision-making by both corporations and investors.