How Greenwashing Affects the Bottom Line

New research shows that when companies overcommit and/or do not deliver on promised socially responsible initiatives they damage their relationships with their customers. However, a company’s reputation for product quality or innovation may mitigate such a negative impact on customer satisfaction.

Consumers today face a barrage of green-friendly messaging from companies hoping to profit from increased concern over environmental issues. Unfortunately, many of these environmental promises don’t pan out. Research carried out in Europe found that 42% of green claims were exaggerated, false, or deceptive, which points to greenwashing on an industrial scale. This is dangerous ground for companies.

We already know that stakeholders punish those companies that misbehave or cause harm (eg, BP’s Deepwater Horizon oil spill or Volkswagen’s emissions scandal), but our new research shows that when companies, for whatever reason, fail to meet their stated social responsibility goals, customers perceived them to be greenwashing — and judged them harshly. Importantly, greenwashing negatively impacts a customer’s experience with a company’s product or service. This finding is critical for companies to understand: it is not only a matter of bruised reputation, as previous work has highlighted; When customers believe a company is greenwashing, it directly affects how they experience its products or services.

Customers know what’s really happening.

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

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

To be more precise, we estimate that companies that are perceived to be greenwashing suffer, on average, a 1.34% drop in their ACSI customer satisfaction score. Even though at first glance, this might sound like a small effect, it actually isn’t. Companies are intensely competing within a relatively narrow range of ACSI scores, and a 1.34% drop matters. Moreover, this blow to customer satisfaction is economically significant; Prior studies found that even small changes in a firm’s customer satisfaction score can have significant implications for corporate performance. A change of merely one unit in customer satisfaction (as measured by ACSI) has been estimated to result in 0.032 units of change in net earnings per share (EPS) and 0.40 units of change in return on investment (ROI).

But they only care to a point.

In a surprising twist, we found that customers, while punishing companies they thought were greenwashing, gave a pass to those brand they held in high regard. They weren’t more likely to support these companies than others, they just no longer factored failed benchmarks into their satisfaction. According to our estimates, companies with a high capability reputation — ie, a reputation for high product quality or innovativeness — managed to maintain their customer satisfaction levels intact when perceived to be greenwashing (they experienced only a small and statistically insignificant drop of 0.30%) . On the other hand, the customer satisfaction for firms with a low capability reputation drops by 2.40% when they are perceived to be greenwashing.

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

What this means for managers.

There are many reasons why companies may fail to implement their goals and be perceived as greenwashing: they may be unable to the necessary changes (or be incompetent), they may lack the resources, or they may indeed be intentionally overstating their environmental credentials. Ambitious yet unattainable goals may also serve corporate executives’ agendas rather than the interests of the corporation.

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

Second, even though companies with high-quality or innovative products could temporarily buffer any negative effects of greenwashing, counting on this happening for companies who try to compensate for low-quality products through environmental commitments is a very risky strategy: if they fail to execute on such goals and they are perceived to be greenwashing then they have no safety net (ie, no reputation capability) to fall back on. Indeed, the risk is quite high considering that greenwashing not only has a negative impact on customer satisfaction but, by extension, it also harms brand, reputation, and brand loyalty, as well as customers’ purchase intentions and repeat purchases. Greenwashing also poses a regulatory and legal risk in some countries while regulatory oversight globally is on the rise.

Building green confidence.

Customers, despite the bombardment of green messaging they receive, can’t often know or understand exactly why companies fail to implement their environmental goals. Perhaps that is also the reason why they, by default, look at corporate environmental commitments with skepticism and have a hard time trusting companies to act in the best interests of society.

But with increased transparency and accountability, customers will likely react differently depending on their own understanding of the reasons behind companies’ failure to implement their goals. It may well be the case that they are willing to forgive companies that tried and legitimately failed to implement their goals but customers might also be less forgiving towards those companies that attempted to cheat their way by exaggerating their credentials. The takeaway here is simple: a company’s messaging and implementation of social goals must always be the same shade of green.

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