The rise of the awareness of ESG—environmental, social and governance—and its importance started to truly take form three years ago. While ESG has essentially been a part of many corporations ideology and strategy for decades, the term and customers’ familiarity became more prevalent in 2020 due primarily through heightened awareness of ESG’s importance to the world’s wellbeing.
Once considered a niche for large global companies, improving ESG goals has become a focus for organizations of all sizes across industries and geographies. And, given the growth of ESG reporting mandates around the world, it’s safe to say that ESG is here to stay. Our question at ReputationUs is, does your company truly care for ESG or is it simply ‘greenwashing’ its customers?
- As of 2020, 88% of publicly traded companies, 79% of venture and private equity-backed companies, and 67% of privately owned companies had ESG initiatives in place. [NAVEX Global]
- More than three out of four (77%) small- and mid-caps have a formal purpose statement related to ESG. [Quoted Companies Alliance]
- Nearly one out of five (18.5%) small- and mid-caps are using ESG standards. [Quoted Companies Alliance]
Corporate Care or Greenwashing
Over the past three years, most corporations seemingly say the “right things” about their support of ESG factors. But are companies involved in ESG because they care, or are they simply offering lip service to avoid scrutiny?
The topic of ESG is a big and ever-evolving business discussion. When it comes to managing your good reputation within it, RepUs offers the ABCs of ESG and important insights to consider.
A is for Acknowledging ESG’s Hard Truth
Companies hoping to profit from increased concern over environmental issues offer consumers a range of green-friendly messaging. Unfortunately, many of these environmental promises don’t pan out. Recent research carried out in Europe found that 42 percent of green claims were exaggerated, false or deceptive. This is dangerous ground for companies managing their reputations.
A survey by NAVEX Global shows only 50 percent of respondents believe their company performs very effectively against environment metrics; just 39 percent believe their company performs well for governance; and 37 percent for social issues.
There are many reasons companies may fail to implement their ESG goals: they may be unable to because they lack the resources to make necessary changes. Ambitious yet unattainable goals may serve executive agendas, rather than a greater interest, or be driven by market pressures more than business strategy.
A McKinsey Sustainability survey shows that more than 5,000 businesses have made net-zero commitments as part of the United Nations’ “Race to Zero” campaign — but that doesn’t mean net-zero is in sight. Pressure has made reacting to climate change more urgent than perhaps climate change itself.
Moreover, some ESG critics say ESG gets in the way of what businesses are supposed to do: “Make as much money as possible while conforming to the basic rules of the society,” as Nobel-prize winning economist Milton Friedman phrased it more than a half-century ago.
Viewed in this light, ESG can be presented as a public relations move, or a way to profit from the higher motives of customers, investors and employees. ESG can sometimes become good for the brand, but not foundational to company strategy. Some have cast ESG efforts as “greenwashing,” “purpose washing,” or “woke washing.”
A survey released by supply chain management specialist Efficio, which interviewed 529 C-suite leaders globally, found that ESG is a top-five business priority, but does not align with strategic priorities. “We are still not moving at ESG issues fast enough, nor with the commitment to make real change,” the report states, finding that of the 74 percent of businesses that have set a target to reduce their greenhouse gas emissions, only 33 percent state that they are very confident in their organization’s ability to meet those targets.
B is for Buffering Provided by a Good Reputation
A survey on Consumer and Employee ESG Expectations released in 2021 by consulting firm PWC shows that when companies overcommit and/or do not deliver on promised socially responsible initiatives they damage their relationships with their customers. However, a company’s reputation for product quality or innovation may provide a buffer.
PWC studied 202 publicly traded large U.S. firms and examined the companies’ stated goals and actions related to green product innovation for the period 2008–2016, as well as customer satisfaction data from the American Customer Satisfaction Index (ACSI); social responsibility data from Thomson Reuters’ ASSET4 ESG database; and accounting and financial data from WorldScope.
The survey found that customers are highly likely to be aware of the gap between stated goals and implementation, and that customer satisfaction levels (as measured by ACSI), fall as the number of goals outweighs the number of actions. This disconnect triggers perceptions of corporate hypocrisy, which affects the customers’ experience with the product itself.
Companies perceived to be greenwashing suffer, on average, a 1.34 percent drop in their ACSI customer satisfaction score. Small changes in a firm’s customer satisfaction score can have significant implications. A change of one unit in customer satisfaction (as measured by ACSI) is estimated to result in 0.032 units of change in net earnings per share and 0.40 units of change in return on investment.
When companies fail to meet their stated social responsibility goals, customers perceived them to be greenwashing — and judged them harshly. Importantly, greenwashing negatively impacts a customer’s experience with a company’s product or service.
But here’s the twist—if you already have a good reputation, it can help you if you are still working on your ESG. The survey found that customers — while feeling negative about companies they thought were greenwashing — gave a pass to those whose brand they held in high regard. They weren’t more likely to support these companies than others, they just no longer factored failed benchmarks into their satisfaction. This is another excellent reason to continue to enhance, protect and defend your good reputation, and/or have a reputation audit conducted by ReputationUs if you are unsure about the current status of your reputation.
Companies with a high capability reputation (i.e., a reputation for high product quality or innovativeness) maintained their customer satisfaction levels when perceived to be greenwashing (they experienced a statistically insignificant drop). On the other hand, the customer satisfaction for firms with a low capability reputation drops by 2.40 percent when they are perceived to be greenwashing.
When the reputation quality (or innovativeness) of a product is high enough, greenwashing does not significantly affect customer satisfaction. But this result should be interpreted with caution. The buffering effect may be temporary and change over a longer time horizon, especially as, the survey says, “customer preferences and expectations toward socially responsible corporate behavior are shifting rapidly.”
C is for Communication and Consistency
If you are like most leaders, when you consider ways to manage your corporate reputation, you may seek to avoid scandal and prevent harm. But it is important to pay equal attention to how you communicate your social responsibility goals in relation to your ability to implement them. Reputationally, it is better to put two goals out there and deliver on two, rather than have four and only deliver on two.
The Efficio survey found 67 percent of business leaders agree that overpromising on sustainability-related goals is a major reputational risk to their organization.
If you don’t meet all of your ESG goals, customer satisfaction may be affected, and by extension, brand loyalty. Keep in mind, there may also be regulatory and legal risks, especially as regulatory oversight is on the rise globally.
Embarking on a formal ESG journey is a big undertaking. Done right, it requires a significant investment of money and resources. However, these efforts can pay off in the long run:
- ESG strategies can affect operating profits by as much as 60 percent [McKinsey]
- 88 percent of consumers will be more loyal to a company that supports social or environmental issues [Cone Communications]
- 76 percent of consumers say they will stop buying from companies that treat the environment, employees, or the community in which they operate poorly. [PwC]
As consumers take up more causes, many expect companies to take a stand on social and environmental issues. Companies that don’t adapt may find themselves at odds with their customers, employees, investors, regulators — and their good reputations.