Third-party certification: how to effectively prevent greenwash in green bond market? –analysis based on signalling game

Although third-party certification has been widely regarded as an important means of controlling greenwash, an issue that hampers environmental sustainability and pollution control outcomes, third-party certification has limited effects on greenwash in Chinese green bond market. How to make third-party certification effectively prevent greenwash has become an urgent problem to solve under current context that third-party certification for green bond is not compulsory in China. We attempt to address this problem for the first time by applying two simple game models and two signalling game models through three stages. The equilibrium results show that (1) information transmission is crucial in preventing greenwash; (2) providing the incentive for issuers to undergo third-party certification is the key for third-party certification to effectively prevent greenwash in Chinese green bond market; (3) when there is the incentive for issuers to undergo third-party certification, third-party certification can function as an effective signal that separates non-greenwashing issuers from greenwashing ones, which is conducive to alleviating information asymmetry, thereby preventing greenwash effectively in green bond market. Also, the theoretical range of the incentive is determined, implying that the incentive should be within the theoretical range to play its role. This study further provides policy implications of establishing an incentive mechanism that the government should provide tax deductions and exemptions, offer financial subsidies, and grant priority approval privileges for the green bond issuers who actively adopt third-party certification. Graphical abstract