Despite the blowback against environmental, social, and governance (ESG), studies consistently show that good ESG practices positively affect corporate profitability. But, as TriplePundit notes, it’s relatively easy to measure ESG-related cost savings (from things like improving energy efficiency or reducing employee turnover), but “assessing how sustainability efforts improve top-line growth is trickier.”
In plain English, do consumers favor products and retailers that care about ESG, and if so, does this preference translate into more purchases and higher revenues? Here is some data-driven evidence.
Chain Store Age reports that according to KPMG’s 2023 Winter Consumer Pulse Survey, 37 percent of U.S. consumers consider environmental sustainability when making purchase decisions, and 33 percent consider social responsibility. That’s not everyone, but it’s a big number. What’s more, 50 percent of those age 13-17 say that environmental sustainability is important to their purchase decisions. In a decade or so, those teenagers will be young adults who control a big chunk of consumer spending in the U.S.
According to Sustainable Brands (SB), 66 percent of U.S. consumers and 80 percent of young adults (ages 18-34) in the U.S. are willing to pay more for sustainable products versus competing products that are less sustainable, even though inflation has pushed prices up over the past 12-18 months. There is a caveat: consumers say they’re not sure how to identify environmentally- friendly companies. In a recent survey by SB, 50 percent of consumers say that clear language on product packaging is important.
For companies that do business outside the U.S., and investors who look for opportunities globally, according to Oney (a leader in fractional payments in several European countries), close to 90 percent of consumers in Europe are ready to change their daily consumption habits to support sustainability. The CX Network Ethical Consumer Markets Report 2021 found that ethical consumer spending and finance in the U.K. increased by nearly 24 percent from 2019 to 2020, with the size of the market now standing at £122bn.
It’s starting to look like the answer to our “plain English” question is “yes, consumers care about ESG and it does affects their shopping habits.”
Digging into the KPMG Consumer Pulse Survey reveals that among those who care about environmental sustainability, over 75 percent look for environmentally friendly products and/or packaging. In other words, ESG is not just about companies reducing their carbon footprints. Shoppers don’t want small products to be wrapped up in big packages, and plastic is a turn-off.
GroceryDive reports that Kroger (the largest grocery store chain in the U.S.) runs a recycling program that has reached a milestone of recycling one million pieces of plastic packaging from the grocer’s line of private label products. Customers use prepaid shipping labels to mail in eligible flexible packaging, and the donated materials are used to build playgrounds that Kroger donates to youth and community groups. This incentivizes customers who care about recycling to buy Kroger’s private label goods, which tend to be more profitable than other products.
Getting back to the KPMG Consumer Pulse Survey, approximately 50 percent of those who participated look at product labels, descriptions, images, or marketing to assess environmental sustainability. In other words, ESG messages that shoppers see on packages or in ads matters. And while this could raise concerns about incentivizing companies to engage in greenwashing, the G in ESG reminds us that good governance practices matter, too. Violating the FTC’s truth-in-advertising requirements would clearly hurt a company’s credibility with consumers.
Let’s get granular
In a different study, survey giant NielsenIQ joined forces with McKinsey to explore the correlation between ESG-related claims and sales performance, based on five years of data on consumer product sales in the U.S. (from 2017 to June 2022). Their analysis covered 600,000 individual product SKUs representing $400 billion in annual revenue from 44,000 brands across 32 food, beverage, personal-care, and household categories.
They looked for ESG-related terms such as “cage free,” “biodegradable,” and “eco-friendly” on the products’ packages. The analysis provide insights into whether products with ESG-related claims outperform their peers in terms of sales growth. In short, products that made these claims showed a 28 percent cumulative growth over five years, versus 20 percent for products that made no such claims.
Both large and small brands saw growth in products that make ESG-related claims, with some variation across categories – for example, in sports drinks and hair care, smaller brands grew more quickly, while larger brands selling fruit juice and sweet snacks with ESG claims grew more than small brands. Interestingly, established products that made ESG-related claims tended to experience slower sales declines than those that did not.
The S in ESG: Do Consumers Care?
Okay, the evidence shows that customers care about the E in ESG enough to pay more for environmentally products, or have a preference for retailers who show they are committed to improving environmental practices. What about the S in ESG? Do we, as consumers, care about how employers treat their employees and other stakeholders?
An article on Restaurant Business Online reports that Qualtrics, a cloud-based platform for creating and distributing web-based surveys, found that nearly half of American consumers (47 percent) say that employee-centric operations are more deserving of their trust. But it’s harder to draw a straight line between how a company treats its employees and increased sales. Many sources claim that happy, engaged employees deliver better customer service than disgruntled employees and that certainly rings true. But does it drive revenue growth?
A study published in the Harvard Business Review (HBR) offers some insights. Researchers worked with a large global retail brand that agreed to share its anonymized data for research purposes. They focused on a particularly service-oriented in-store department and obtained three years of in-depth data from over 1,000 of the company’s brick-and-mortar locations across the U.S. The goal of the study was to determine whether the composition of customer-facing employees in these locations — all else equal — affects revenue and profits.
According to the HBR, the results were striking. The researchers found a clear link between employees and revenue, and the impact was substantial. Quoting here: “In fact, if an average store could move from the bottom quartile to the top quartile in each of the employee experience metrics we studied, they would increase their revenue by more than 50%, and profits by nearly as much.”
Furthermore, as consumers, we have all probably had both positive and negative interaction with employees in a store or restaurant, on a phone call or online chat. When those experiences are either particularly good or particularly bad, what do we do? We talk about them to our friends, family members, and on social media platforms. Relating those personal experiences can drive business toward or away from all kinds of retailers and service providers.
Does Bad Governance Hurt Sales?
Lastly, we consider whether consumers consider a company’s corporate governance practices when choosing where to shop and what to buy—we found little evidence that they do. That’s not surprising, as corporate governance is not visible to most consumers – when we shop in a grocery store or order things online we don’t see anything about whether the company pays bribes to win business or has enough independent directors on its board.
A study from Northwestern University’s Kellogg School of Management shows that behaviors that do not directly impact consumers’ experience with a brand (such as Wal-Mart bribing officials in Mexico, or The Gap polluting water in Indonesia, among others) are not likely to affect consumers’ purchase decisions in the same way as false claims and products that cause harm. That’s not to say that good governance doesn’t matter – clearly it can have a huge effect on business performance (we cite a few doozies here). It just has more of an indirect impact unless the scandal is large and very visible.
In sum, consumer products companies and retailers have a lot at stake when it comes to how ESG affects customers’ purchasing decisions. OWL ESG’s data can help you to evaluate how companies within an industry compare to their peers on ESG practices that affect consumers. Contact us to learn more.