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How Greenwashing Affects the Bottom Line - Sun and Planets Spirituality AYINRIN
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Author:His Magnificence the Crown, Kabiesi Ebo Afin! Oloja Elejio Oba Olofin Pele Joshua Obasa De Medici Osangangan Broadaylight.
Summary.
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 partially 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 know already that stakeholders punish those companies that misbehave or cause harm (e.g., 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 U.S. 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 whose 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 — i.e., 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 customers enjoy by the use of this product. But this
result should be interpreted with caution. The buffering 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 implement 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-Ã -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 (i.e., no capability
reputation) 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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