Environmental, social, and governance issues are becoming increasingly relevant for a variety of stakeholders. Investing with ESG goals in mind has become a big focus of asset managers in recent years, and executive compensation is tied to ESG performance in a majority of S&P 500 companies. At some including Disney, employees have raised their voices in efforts to push companies toward policies they consider more responsible.
But the ultimate test of ESG’s value is in the consumer markets, note University of Florida’s Joel F. Houston, University of Hong Kong’s Chen Lin, Fordham’s Hongyu Shan, and Auburn’s Mo Shen. In an analysis of almost 150 million purchases made by American households between 2008 and 2019, they find that consumers—particularly younger ones—care about ESG too.
To isolate how much value consumers place on ESG, the researchers looked at the reaction to negative ESG news—about pollution spills, tax evasion, human-rights abuses, employment discrimination, and other instances of what they term “ESG scandals.”
They identified these scandals through the RepRisk database, which tracks negative news in 28 ESG categories. RepRisk covers more than 200,000 public and private companies and takes its information from external sources, not the companies themselves. The study includes more than 1,600 negative events.
Lastly, to gauge consumers’ reactions, the researchers analyzed NielsenIQ Consumer Panel data housed at Booth’s Kilts Center for Marketing. This information, collected from shoppers, reflects the behavior of 40,000–60,000 households.
Consumer reaction to ESG scandals tends to be swift, the researchers find. As soon as news became public, sales began to slide. “Overall, the average reputation shock triggers a 5–10 percent drop in customer sales that extends for at least six months,” write Houston, Lin, Shan, and Shen. Severer scandals led to bigger sales drops, all of which were caused by reduced consumer demand as opposed to product supply.
When companies had a scandal related to an environmental, social, or governance issue—news of their air pollution broke or human-rights abuses came to light, for example—sales of their products fell immediately and continued to decline six months after the incident, according to research.
Purchasing changed most noticeably when there was negative news surrounding social discrimination, corruption, and employment discrimination, according to the study. However, environmental scandals were also salient, and reaction was most intense among consumers who lived in areas that had experienced severe weather-related damage such as from hurricanes or flooding.
Higher-income households reacted particularly strongly to ESG scandals. So did younger consumers, whose reaction is in line with the results of a 2021 Pew Research Center report indicating that millennials and members of Generation Z (born in the late 1990s through the early 2010s) are engaging more with climate-change issues through activities such as volunteering and protesting.
Corporations should take note, the researchers urge. “On balance, these results provide compelling evidence that customers do take ESG considerations into account, and that the corresponding drop in expected sales may induce many companies to take proactive steps to mitigate ESG-related controversies,” they write. Shoppers are discerning about where they spend money, and when a scandal breaks, they’ll take their dollars elsewhere.
Joel F. Houston, Chen Lin, Hongyu Shan, and Mo Shen, “How Does ESG Shape Consumption?” Working paper, April 2023.
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