The alignment between consumer values and purchasing behavior has often been a subject of debate, especially when it comes to Environmental, Social, and Corporate Governance (ESG) practices.
The “say-do gap” has left many businesses questioning whether investing in ESG initiatives truly pays off. However, recent research led by Jean-Marie Meier, a visiting professor of finance at Wharton, sheds new light on this issue, providing compelling evidence that ESG investments indeed lead to higher sales.
The study, drawing on data from Nielsen Retail Scanner spanning from 2008 to 2016, delves into the relationship between a company’s ESG rating and the sales performance of its products in local markets.
What it uncovers is a significant and positive correlation between a company’s Environmental and Social (E&S) rating and the sales performance of its products. For every one-standard-deviation increase in a company’s E&S rating, there was a remarkable 9.2% surge in sales for the average product sold within the same U.S. county the following year.
“This research highlights a fundamental shift in consumer behavior,” Meier noted. “Consumers really are putting their money where their mouth is, demonstrating a tangible preference for products from companies that embrace ESG principles.”
The findings of this study challenge the skepticism surrounding the economic viability of ESG investments. They offer reassurance to businesses considering or already committed to ESG practices, indicating that such initiatives not only align with consumer values but also translate into tangible financial benefits.
Meier emphasizes the significance of these findings for businesses, stating, “This is good news for firms that want to pursue ESG practices. And for others that are unsure, this paper is evidence that it might be worth it.”
Indeed, the research underscores the growing importance of ESG considerations in business strategy. Beyond the ethical imperative, embracing ESG principles now appears to be a strategic imperative for companies seeking to thrive in an increasingly discerning market environment.
As consumers become more conscious of the social and environmental impacts of their purchasing decisions, businesses that prioritize ESG practices stand to gain a competitive edge. From reducing carbon footprints to promoting social responsibility and ethical governance, ESG initiatives not only resonate with consumers but also drive financial performance.
Pro-ESG or Anti-ESG: What Do the Sales Say?
According to the report, over the past two decades, ESG has risen to the forefront of the minds of consumers, businesses, and policymakers alike. A common viewpoint is that businesses can simultaneously generate profit while contributing positively to the environment and society. Yet, despite numerous academic studies on the subject, the precise impact of ESG initiatives on a company’s success and value remains a subject of debate.
Experts diverge on the effects of ESG activities, with some contending that it could enhance a company’s value by reducing borrowing costs or motivating employees to increase their productive effort.
Conversely, ESG skeptics argue that these activities may impose financial strains and divert attention from profit-making activities. However, there is relatively little evidence on whether a firm’s ESG performance affects a company’s cash flows.
In their research, funded by The ESG Initiative at the Wharton School, Meier and his co-authors zero in on how consumers in retail markets react to a company’s E&S activities, particularly through the lens of cash flows.
Unlike previous studies, the researchers leverage detailed sales data for specific products across different regions of the U.S., enabling comparisons between similar products offered by companies with varying E&S commitments.
“This allows us to make apples-to-apples comparisons, which gives us confidence in establishing a relationship between ESG performance and sales,” Meier noted.
To ensure the reliability of their findings, the researchers controlled for various factors that could be influencing sales — including advertising, corporate governance, and product quality.
Moreover, the academics observed a pattern where negative corporate news about E&S issues precedes, but does not follow, declines in product sales, indicating that consumers respond with their wallets to unfavorable reports about a company’s practices.
Demographics and Market Dynamics Are Key Influencers
There are, importantly, demographic nuances, where the correlations between a company’s E&S score and its subsequent sales are stronger in counties with more Democratic voters and higher earners.
This suggests that consumers’ political affiliations and economic circumstances influence their decision to buy from socially responsible companies, with left-leaning and more wealthy shoppers happier to splash out on eco-friendly goods.
“So depending on the potential customer base of your products, the effect of better ESG practices on revenue might be smaller or larger,” Meier advised companies.
Furthermore, local market dynamics play a role, with a company’s product sales inversely correlated with the E&S performance of local competitors, the study found. In other words: when one company improves its E&S performance, it tends to negatively impact the sales of products from competitors who have not made similar improvements. And that, said Meier, underscores the competitive pressure for firms to continually enhance their E&S practices, potentially fostering a positive cycle of improvement.
“Even if you don’t change your own ESG practices, if a competitor does so, that can still affect you. So the market might be pushing firms in an eco-friendly direction, even if they don’t like it,” he explained.
Moreover, the study shows that when big natural and environmental disasters happen, consumers pay more attention to how eco-friendly a product or company is. And they are more likely to buy products from local companies with better environmental and social ratings after such events. “When something big happens nearby, people care more about buying from companies that do good things for the planet and society,” Meier stressed.
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