As the saying goes, consumers vote with their wallets. Every time we go into a store, click “Add to Cart” when shopping online, pick a restaurant, use a rideshare app, or stay at a hotel, we are expressing a preference. Similarly, by avoiding a particular store, website, or service, we are saying, “I don’t like your products, the way you deliver you service, or something else about your company.”
A big element of consumer purchase decisions comes down to how they feel about a brand. Companies know that a brand is extremely valuable, to the point where they will cut ties with a partner or spokesperson (celebrity status notwithstanding) who says or does something that damages the brand’s reputation and drives customers away. But what if it’s the company itself that is doing something (or failing to do something) that a big chunk of its customer base finds problematic?
Consumers are now using their wallets to tell companies that climate change and other ESG-related issues are important to them, and to hold companies accountable for their choices about these issues. If customers don’t like a company’s sustainability practices and are willing to use their wallets to express that displeasure, that’s bad for a company’s brand, its profits, and its investors. Here, we share some facts about consumers “voting with their wallets” and offer suggestions for how companies can, as the cliché goes, “get out in front of this issue.”
Do retail customers care about a company’s ESG practices?
First we talk about consumers’ voting with their wallets based on companies’ efforts to reduce global warming. Is that really going on? Short answer: yes. According to a 2021 national survey conducted by the Yale Program on Climate Change Communication, 41 percent of Americans say that going forward they intend to reward companies that are taking steps to improve their climate change mitigation strategies. Here are some other findings:
- 33 percent of those surveyed say they have rewarded companies that are taking steps to reduce global warming by buying their products in the past 12 months. Think about that for a minute. One in three customers say they are rewarding companies based on this issue.
- 28 percent said they have punished companies that oppose steps to reduce global warming by not buying their products, and 41 percent said that going forward they intend to do more to punish companies that oppose steps to reduce global warming.
- 50 percent said they would be more likely to purchase goods from a company that is lobbying Congress to pass legislation to reduce global warming, while only 15 percent said they would be less likely to purchase goods from such a company.
- A clear majority (70 percent)either “strongly” or “somewhat” agree that companies should use clean, renewable energy to power their operations, and should not advertise on TV networks that spread misinformation about climate change (75 percent).
- And here’s a reminder of the power of information and communication: when asked why they might not punish companies that oppose steps to reduce global warming, 71 percent said they do not know which companies to punish – in other words, if they had more information, they would act on it. And, 58 percent said nobody has ever asked them to do so – just imagine what might happen when someone in their social network asks them to?!
- Also worth noting: 54 percent are at least “moderately confident” that by working together with people like them, they can affect what local businesses do about global warming, and almost half (48 percent) are confident that people like them can affect what corporations do about it.
Based on this, we think companies have three choices:
- communicate about efforts to reduce greenhouse gas emissions and fight global warming, appealing to the (many) customers who care about this issue;
- take steps to fight global warming but say nothing about it and lose customers to competitors who are better communicators, or
- do nothing and hope no one pays attention.
Of course, that third option isn’t realistic with businesses like OWL actively looking for information about what companies are and are not doing in this arena, but we suppose some will try this “stick your head in the sand” approach.
Another study, this one conducted by Deloitte, found that consumers’ top five concerns for sustainable or ethical practices include:
- Producing sustainable packaging and products
- Reducing waste in the manufacturing process
- Committing to ethical working practices
- Reducing their carbon footprint
- Respect for human rights
In other words, consumers no longer want companies to have ESG and sustainability strategies —they expect them. These expectations are especially high among the Gen Z cohort, whose disposable income is large and growing.
How to find out what matters to your customers?
What should consumer-facing companies and their investors do about this clear and growing consumer preference for sustainable behaviors? Is it a risk? Yes. Is it an opportunity? Yes! An article published on Yahoo! Finance by The Antea®Group USA (an environment, health, safety, and sustainability consulting firm), recommends four steps that companies should take to help recognize the risks and find the opportunities. We summarize them here, with a few modifications.
1. Transparency begins at home
A consumer-facing company can be vulnerable to negative disclosures about its activities at various stages, such as where it sources products, its packaging, warehousing practices (consider the bad press Amazon has received about pushing warehouse workers beyond the breaking point), and in its retail spaces. A “Sustainability Impact Assessment” evaluates how each area of a business and its supply chain impact people and the planet. Here’s an example from Oppla in the EU. Of course, this exercise can reveal some unpleasant truths, but being honest about a company’s impacts can help ward off problems.
2. Get engaged
Do you know how important various ESG topics actually are to your stakeholders, both internal and external? Don’t assume – ask! The Antea Group recommends conducting a Materiality Assessment that includes the following steps. This may sound obvious but many of these things are too easily overlooked when a business has preconceived notions about the outcome.
- Identify your stakeholders
- Identify and prioritize what you want to measure
- Design a survey that asks about the materiality of various ESG issues. Ask questions that can be answered using a numerical scale, such as 1-5 or 1-10 to generate quantitative data that can be analyzed (leave space for comments). Survey results can be biased by the way questions are worded or organized, so test it out on a small group first.
- Conduct the survey with a representative group of stakeholders (not always easy, as talking with a small number of a certain type of stakeholder won’t be enough to draw meaningful, actionable conclusions).
- Analyze the results. Again, not easy, because those inside the company who have a particular (non-objective) point of view are likely to downplay results that don’t match their expectations, and emphasize those that do. If someone who is involved in this effort says something like, “Aha! See, I told you that this kind of customer cares/doesn’t care about XYZ!”, that’s a red flag…
3. Compare and Contrast
After the survey shows what ESG issues are most material to your stakeholders, evaluate your policies and procedures and ask, “What’s working and what’s not?”
- How do ESG factors fit into your strategy, product development, etc.?
- Do your initiatives align with what consumers and other stakeholders want?
- Are customers the only stakeholders that drive your initiatives?
- What is your risk tolerance when it comes to noncompliance, bad press, etc.?
4. Give people something to talk about
After completing Steps #1-#3, share what you’ve learned. Communicate with internal and external stakeholders. You will benefit from this transparency (see #1). And provide updates on your progress – consumers are paying attention.
OWL ESG is a leading provider of data that shows how companies are, or are not, addressing environmental, social, and governance issues. Investors, financial advisors, corporations, and other stakeholders rely on us to help with their assessments. Contact us to learn more.