The disparity between consumer concern for the environment and social issues and actual action, termed the “say-do gap,” has long confounded businesses dedicated to ESG (environmental, social, and corporate governance) practices. However, recent research co-authored by Jean-Marie Meier, a visiting professor of finance at Wharton, provides fresh evidence that consumers are indeed backing their values with purchasing power, contrary to anti-ESG claims.

Drawing on data from Nielsen Retail Scanner spanning 2008 to 2016, the study found a strong positive relation between a company’s Environmental and Social (E&S) rating and the sales performance of its products in local markets. For every one-standard-deviation increase in a company’s E&S rating, there was a 9.2% surge in sales for the average product sold within the same U.S. county the following year. 

“Consumers really are putting their money where their mouth is,” Meier said. “This is good news for firms that want to pursue ESG practices. And for others that are unsure, this paper is evidence that it might be worth it.”

Pro-ESG or Anti-ESG: What Do the Sales Say?

Over the past two decades, ESG has risen to the forefront of the minds of consumers, businesses, and policymakers alike. A common viewpoint is that businesses can simultaneously generate profit while contributing positively to the environment and society. Yet, despite numerous academic studies on the subject, the precise impact of ESG initiatives on a company’s success and value remains a subject of debate.

Experts diverge on the effects of ESG activities, with some contending that it could enhance a company’s value by reducing borrowing costs or motivating employees to increase their productive effort. Conversely, ESG skeptics argue that these activities may impose financial strains and divert attention from profit-making activities. However, there is relatively little evidence on whether a firm’s ESG performance affects a company’s cash flows.

“Even if you don’t change your own ESG practices, if a competitor does so, that can still affect you.”— Jean-Marie Meier

In their research, funded by The ESG Initiative at the Wharton School, Meier and his co-authors zero in on how consumers in retail markets react to a company’s E&S activities, particularly through the lens of cash flows. Unlike previous studies, the researchers leverage detailed sales data for specific products across different regions of the U.S., enabling comparisons between similar products offered by companies with varying E&S commitments. 

“This allows us to make apples-to-apples comparisons, which gives us confidence in establishing a relationship between ESG performance and sales,” Meier noted.

To ensure the reliability of their findings, the researchers controlled for various factors that could be influencing sales — including advertising, corporate governance, and product quality. Moreover, the academics observed a pattern where negative corporate news about E&S issues precedes, but does not follow, declines in product sales, indicating that consumers respond with their wallets to unfavorable reports about a company’s practices.

Demographics and Market Dynamics Are Key Influencers

There are, importantly, demographic nuances, where the correlations between a company’s E&S score and its subsequent sales are stronger in counties with more Democratic voters and higher earners. This suggests that consumers’ political affiliations and economic circumstances influence their decision to buy from socially responsible companies, with left-leaning and more wealthy shoppers happier to splash out on eco-friendly goods.

“So depending on the potential customer base of your products, the effect of better ESG practices on revenue might be smaller or larger,” Meier advised companies.

“Consumers really are putting their money where their mouth is.”— Jean-Marie Meier

Furthermore, local market dynamics play a role, with a company’s product sales inversely correlated with the E&S performance of local competitors, the study found. In other words: when one company improves its E&S performance, it tends to negatively impact the sales of products from competitors who have not made similar improvements. And that, said Meier, underscores the competitive pressure for firms to continually enhance their E&S practices, potentially fostering a positive cycle of improvement.

“Even if you don’t change your own ESG practices, if a competitor does so, that can still affect you. So the market might be pushing firms in an eco-friendly direction, even if they don’t like it,” he explained.

Moreover, the study shows that when big natural and environmental disasters happen, consumers pay more attention to how eco-friendly a product or company is. And they are more likely to buy products from local companies with better environmental and social ratings after such events. “When something big happens nearby, people care more about buying from companies that do good things for the planet and society,” Meier stressed.

But could the study’s conclusions be influenced by alterations in the supply of products rather than changes in consumer demand? Meier reassures that the evidence suggests otherwise. For example: While companies may invest in E&S initiatives to improve their green credentials, the decision to produce more goods still depends on whether there is enough demand from consumers to buy them.  

Ultimately, the study underscores a consumer shift towards aligning values with purchasing decisions. As shoppers increasingly vote with their wallets, Meier concluded that companies stand to benefit from prioritizing ESG initiatives.