Stigma is known as a serious liability for business. But can it also be an asset? That is the question we set out to answer in new research published in the Journal of Management Studies.

To answer this question, we investigated how the market responds to firms stigmatized as “sinful” (e.g., tobacco, alcohol, gambling) or “dirty” (e.g., oil and gas, mining, chemicals) when they are caught greenwashing – a nefarious business practice by which firms misrepresent themselves as more socially and environmentally responsible than they really are (e.g., the Volkswagen “dieselgate” scandal).

What did we find?

In a study tracking 7,365 firms across 47 countries over a 15-year period, we found that the market penalized firms for greenwashing, as reflected in lower sales. However, market penalties only applied to firms in industries that were not seen to be “sinful” or “dirty”. In other words, firms in “sinful” or “dirty” industries were relatively immune to the market consequences of greenwashing.

In a second study, we conducted a controlled experiment with 434 consumers to determine why – from a consumer psychology perspective – stigma insures companies against the market consequences of greenwashing. Results showed that the reason is because consumers regard “dirty” firms as untrustworthy. In fact, consumers even expected “dirty” companies to have shady business practices – so much so that compared to their non-stigmatized counterparts they were seen to have greater integrity when they engaged in greenwashing.

Taken together, these studies show that the market has a certain “boys will be boys” attitude toward stigmatized firms. As a result, “dirty” firms are given an unspoken social license to pollute and to lie about it.

What are the practical implications?

This research has at least three key implications for managers, regulators, and civil society.

First, it has long been assumed that the market frowns upon greenwashing, but concrete data that supports this assumption is hard to come by. This research offers rare evidence that greenwashing has real financial costs for firms in the marketplace. It is also the first to document the psychological driver of this market phenomenon: greenwashing makes firms less trustworthy in the eyes of consumers.

Second, this research shows that unlike firms stigmatized as “sinful” or “dirty”, companies in “clean” industries (e.g., renewable energy) need to be careful to “walk their CSR talk.” Just as consumers are lenient with “dirty” firms when it comes to greenwashing, they come down especially hard on “clean” companies for the exact same transgression.

Third, this research reveals that stigmatized firms have a competitive advantage when it comes to externalizing business costs onto society and the natural environment. As a result, they can play fast and loose with their CSR commitments and make empty promises with relative impunity. Those who seek to rely on the “free hand of the market” to regulate greenwashing would do well to take note.

Does this mean that “sinful” or “dirty” firms can greenwash with impunity?

In a word, no. These findings should not be misinterpreted to suggest that the market will not hold “sinful” or “dirty” firms to account for greenwashing — only that their punishment for doing so will not be as severe as their non-stigmatized counterparts.

Ultimately, this research shows that stigma is more than just a business liability, but that it is also an asset because it buffers firms from the negative market consequences of greenwashing – and likely other forms of wrongdoing as well. At the end of the day, though, while stigma may have this silver lining, it is still a rather dark cloud.