How Greenwashing Affects the Bottom Line

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New research shows that when companies over-commit and/or fail to deliver on promised socially responsible initiatives, they hurt their relationships with their customers. However, a company’s reputation for product quality or innovation can partially mitigate such a negative impact on customer satisfaction.

Consumers today are faced with a deluge of eco-friendly messaging from companies hoping to cash in on increased concern about environmental issues. Unfortunately, many of these environmental promises do not materialize. Research from Europe found that 42% of green claims were exaggerated, false or misleading, indicating industrial-scale greenwashing. This is dangerous ground for business.

We already know that stakeholders punish companies that misbehave or cause damage (e.g. BP’s Deepwater Horizon oil spill or Volkswagen’s emissions scandal), but our new research shows that when companies, for for whatever reason fail to meet their stated social responsibility goals, customers saw them as greenwashing – and judged them harshly. It is important to note that greenwashing negatively impacts a customer’s experience with a company’s product or service. This observation is essential for companies to understand: it is not just a matter of damaged reputation, as previous work has highlighted; When customers think a company is greenwashing, it directly affects how they experience its products or services.

Customers know what is really going on.

To understand how greenwashing hurts consumer confidence, we studied 202 major publicly traded US companies. We examined the stated goals and actions of these companies related to green product innovation (GPI) for the period 2008-2016 as well as customer satisfaction data from the American Customer Satisfaction Index (ACSI), data social responsibility data from the Thomson Reuters ASSET4 ESG database, and accounting and financial data from WorldScope.

We found that customers are very likely to be aware of the gap between stated goals and implementation, and that customer satisfaction levels, as measured by ACSI, decline as the number of goals exceeds the number of actions. This disconnect triggers perceptions of corporate hypocrisy, which affects customers’ experience with the product itself.

To be more specific, we estimate that companies perceived to be greenwashing suffer, on average, a 1.34% drop in their ACSI customer satisfaction score. Although at first glance this may seem like a small effect, it is in fact not. Companies compete intensely within a relatively narrow range of ACSI scores, and a drop of 1.34% is significant. Moreover, this blow to customer satisfaction is economically significant; previous studies have found that even small changes in a company’s customer satisfaction score can have significant implications for business performance. It is estimated that a single unit change in customer satisfaction (measured by ACSI) translates to 0.032 unit change in net earnings per share (EPS) and 0.40 unit change in return on investment (ROI). ).

But they only care up to a point.

In a surprising twist, we found that customers, while punishing companies they thought were greenwashing, were giving a pass to those whose brand they held in high regard. They weren’t more likely to support these businesses than others, they just didn’t factor failures into their satisfaction anymore. According to our estimates, companies with a reputation for high capability – that is, a reputation for high product quality or innovation – managed to keep their customer satisfaction levels intact when perceived as greenwashing. (they only experienced a small statistically insignificant drop of 0.30%) . On the other hand, the customer satisfaction of companies with low reputation capacity drops by 2.40% when they are perceived as doing greenwashing.

This means that beyond a certain point, when the quality (or innovation) of a product is high enough, greenwashing does not significantly affect customer satisfaction through the use of that product. But this result should be interpreted with caution. The buffer effect we document may be temporary, and therefore future research should explore it over a longer time horizon, particularly because customer preferences and expectations towards socially responsible corporate behavior are changing rapidly.

What this means for managers.

There are many reasons why companies may not achieve their goals and be perceived as greenwashing: they may be unable to implement the necessary changes (or be incompetent), they may lack resources, or they may indeed intentionally exaggerate their environmental credentials. Ambitious but unachievable goals can also serve corporate executives’ agendas rather than corporate interests.

Whatever the reason, based on our research, there are two things managers need to keep in mind. First, even though most managers are concerned with avoiding scandal or preventing harm, they must pay equal attention to how they communicate their social responsibility goals and efforts versus their ability to implement them. implemented. The key is consistency. It is better to promise three and deliver three than to promise eight and deliver six.

Second, while companies with high-quality or innovative products might temporarily mitigate the negative effects of greenwashing, expect this to happen for companies that attempt to offset low-quality products with environmental commitments. is a very risky strategy: if they fail to execute on such targets and they are perceived as greenwashing, then they have no safety net (i.e. no reputation for ability ) to fall back on. Indeed, the risk is quite high given that greenwashing not only has a negative impact on customer satisfaction but, by extension, it also harms the brand, reputation and brand loyalty, as well as purchase intentions and repeat purchases of customers. Greenwashing also poses a regulatory and legal risk in some countries, while regulatory scrutiny globally is increasing.

Building green trust.

Customers, despite the bombardment of green messages they receive, often cannot know or understand exactly why companies are failing to implement their environmental goals. It may also be why, by default, they view corporate environmental commitments with skepticism and find it difficult to trust companies to act in the best interests of society.

But with increased transparency and accountability, customers are likely to react differently based on their own understanding of why companies fail to implement their goals. They may be willing to forgive companies that have tried and legitimately failed to implement their goals, but customers may also be less forgiving of companies that have tried to cheat by overstating their credentials. The takeaway here is simple: a company’s message and the implementation of social goals should always be the same shade of green.

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