We challenge the prevailing view in literature that greenwashing is inconsistent with green bond issuance. We argue that greenwashing actually occurs, as some ESG bond issuers record lower-than-expected environmental expenditures after their ESG bond issuance. Paradoxically, engaging in greenwashing could be optimal for firms that struggle to efficiently use their environmental expenditure for decarbonization. Institutional investors also “reward” those firms with increased investments in such firms. This dynamic may hinder the low-carbon transition. Policymakers should implement strategies to enhance firms' decarbonization efficiency which could discourage greenwashing behavior.