Macroeconomic Distortion in Sustainable Finance: Constructing an Empirical Assessment Model to Measure the Capital Misallocation Risks of Corporate Environmental Misrepresentation

• Adaan Ahsun

  Covenant University

  Author

The rapid expansion of sustainable finance has created unprecedented opportunities for capital allocation toward environmental objectives, yet this growth has been accompanied by a parallel rise in corporate environmental misrepresentation that distorts market efficiency and undermines climate transition efforts. Despite growing awareness of greenwashing practices, no validated empirical framework exists to quantify the macroeconomic consequences of such misrepresentation, particularly the capital misallocation risks that emerge when inaccurate environmental signals influence investment decisions. This study addresses this critical gap by constructing and validating an empirical assessment model that measures capital misallocation risks arising from corporate environmental misrepresentation. Employing a quantitative research design with retrospective data analysis covering 1,200 firms across BRICS equity markets from 2015–2023 and prospective simulation modeling, the research integrates financial mismatch indicators, ESG disclosure quality metrics, and institutional governance variables. The proposed framework demonstrates strong predictive validity, achieving an overall accuracy of 89.4% in detecting capital misallocation risk patterns, with environmental disclosure quality and institutional governance strength emerging as the most significant predictors (β = 0.612, p < 0.001). The findings reveal that weak institutional governance environments amplify capital misallocation by 34.2%, while environmental score consistency reduces misdirection risk by 28.7%. This research provides a replicable diagnostic tool enabling regulators, investors, and policymakers to assess systemic risks and design targeted interventions to preserve the integrity of sustainable finance markets.

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