Do Consumers Care About ESG? Evidence from Barcode-Level Sales Data

Jean-Marie Meier is a Visiting Assistant Professor of Finance at The Wharton School, University of Pennsylvania, Henri Servaes is Richard Brealey Professor of Corporate Governance at London Business School, Jiaying Wei is an Associate Professor of Finance at Southwestern University of Finance and Economics, and Steven Chong Xiao is an Associate Professor of Finance at University of Texas at Dallas – Naveen Jindal School of Management. This post is based on their working paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here); Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) both by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita; The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here); and Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto Tallarita.

The interest of business leaders, academics, policymakers, and the general public in Environmental, Social, and Governance (ESG) issues has grown exponentially over time and reached an all-time high in 2023, based on Google Trends searches.  From the perspective of corporations and their leaders, an important question is whether ESG strategies help achieve higher profits and maximize shareholder wealth.

Despite a substantial number of articles on this issue, the mechanisms through which ESG activities could affect corporate performance and value remain poorly understood.  One possibility is that ESG efforts affect value through the discount rate channel. For instance, some investors may adjust their required rate of return because they derive utility from holding high ESG firms in their portfolios.  Another possibility is that ESG activities affect firm value because they lead to higher cash flows.  For example, customers could influence a firm’s revenues by adjusting their demand in response to the firm’s ESG policies.

In our article, “Do Consumers Care about ESG? Evidence from Barcode-level Sales Data,” we focus on firms’ Environmental and Social (E&S) activities and shed light on the cash flow channel.  Specifically, we analyze how consumers in retail markets respond to a firm’s E&S activities.

The advantage of our setting over prior work is that we have detailed barcode-level sales data on specific products sold at the level of US counties.  The granularity of our data enables us to compare very similar products sold in the same location at the same time by companies with different levels of E&S activities.  If consumers pay attention to the social and environmental externalities of their consumption decisions, we expect this to influence their choices of products and services.  Thus, the demand for a product should depend on its quality from an E&S perspective, a quality that may be perceived through the E&S ratings of the brand owner.

Using the Nielsen Retail Scanner Data over the period of 2008 to 2016, we find that a brand owner’s E&S rating is positively related to local product sales.  The result is economically large: a one-standard-deviation increase in the owner’s E&S rating is related to an increase in sales of 9.2% in the subsequent year for the average product sold in the same county.  Given that we compare very similar products during the same year, it is unlikely that this effect is due to the decision of the company to adjust its supply of products.  We also ensure that this effect is not due to changes in product quality or changes in firm characteristics, other than E&S performance.

We further consider the impact of demographic characteristics on the relation between E&S efforts and product sales and find that this relation is stronger in counties with more Democratic-leaning and higher-income households.  Thus, consumers’ political orientation and income are important in shaping their preferences to consume the products of companies that are more socially responsible.  Moreover, we also find that a firm’s product sales in a county are negatively related to the E&S performance of local rivals that sell the same types of products in the same county.  This finding indicates that consumers choose between alternative products based on the relative E&S performance of the companies in the market, thereby creating additional competitive pressure on firms to improve their E&S standards.  Given the granularity of our data, it is also unlikely that our results are spurious due to the lack of sufficient controls.

We conduct two additional tests to study the relation between a firm’s E&S activities and subsequent sales.  First, we analyze the relation between negative corporate E&S news and product sales at the monthly level and find that the release of negative firm news on E&S-related issues precedes but does not follow product sales declines.  Thus, consumers reduce their demand for products in response to negative news about the firms’ E&S practices, while there is no evidence that firms exhibit E&S concerns after poor sales performance.

Second, we exploit major natural and environmental disasters as shocks to the salience of E&S concerns for local consumers. In these tests, we hold the perceived level of a firm’s E&S performance and product characteristics constant and study whether an exogenous increase in consumer awareness of E&S issues affects the sensitivity of their consumption decisions to firm/product quality from an E&S perspective.  We measure the salience of an event to local consumers based on geographic distance from the county where the event occurred.  Our results indicate that sales become more sensitive to E&S ratings after the disasters, particularly for environmental and community ratings.  We also find that this effect dissipates with distance to the disaster counties, consistent with the importance of salience in shaping consumers’ response to E&S efforts.

This study contributes to the literature on ESG/CSR by providing direct evidence that E&S efforts affect consumer demand–the cash flow channel of ESG.  Our detailed data at the firm-product category-county-year level allows for a more refined apples-to-apples comparison, thereby reducing the likelihood that the results are due to omitted variable bias.  Our setting allows us to provide more direct evidence for the effect of ESG/CSR on consumer demand, as well as to uncover socioeconomic factors that explain customers’ heterogeneous preferences to consume products from more socially and environmentally responsible firms–consumer heterogeneities that can be uncovered using our granular data but not by firm-level data.

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