Take 5: What Good Does It Do a Company to Do Good?
Skip to content
Finance & Accounting Marketing Organizations Jan 4, 2022

Take 5: What Good Does It Do a Company to Do Good?

Kellogg faculty look at how ESG initiatives are received by investors, customers, and employees.

person reads newspaper noting company's ESG initiative

Yevgenia Nayberg

More and more companies are trying to integrate ethical and sustainable practices into their products and policies, often through a commitment to positive environmental, social, and governance (ESG) issues.

But how much do investors, customers, and employees care about these initiatives? Are companies rewarded for their efforts? Here’s a look at research from Kellogg professors that seeks to answer these questions.

1. The Stock Market Rewards Positive ESG News

When a company does good—say, a pledge to go carbon neutral or an initiative to address employee diversity—does the stock market care? That was the question Aaron Yoon, an assistant professor of accounting, and a colleague looked at in recent research.

They analyzed data from more than 3,000 companies and found that stock value did tend to rise after positive news about a firm was made public. But crucially, this only happened if the news was financially material, meaning it related directly to the firm’s industry. So a retailer’s decision to install solar panels at its stores would not be material, but a coffee company’s commitment to pay farmers a fair price for beans would.

Beyond materiality, the researchers found that investors’ reactions changed depending on the category of ESG activities. In general, the strongest positive reactions were to news about how products affected customers, such as changes in safety, affordability, or consumer privacy.

Taken together, the results show that “the market is not viewing ESG as a value-destroying issue,” Yoon says.

2. An Attractive Investment

Investors may also view companies who engage in ESG activities as less risky investments, according to research from finance professor Ravi Jagannathan and colleagues, who looked specifically at the environmental aspectof ESG ratings.

They argue that green companies have the potential to be good investment bets in the long term because they are more likely to outlast sudden industry shake-ups, such as new pollution regulations or consumer-driven demand for more eco-friendly products.

“They can adapt better to these kinds of changes,” Jagannathan says. “Firms that are truly doing better along those dimensions are safer.”

3. Employee Satisfaction Matters

In another research paper, Yoon explored the role of employee satisfaction in whether companies see a benefit from ESG initiatives. He and a colleague conducted an analysis using both data from an ESG ratings firm and data on employee satisfaction from Glassdoor.com.

They then compared the performance of different portfolios of companies. They found that the portfolio of stocks with top ratings in both ESG practices and employee satisfaction generated an alpha of 4.40 percent per year (meaning 4.40 percent in excess of a benchmark return), outperforming the portfolio with the lowest ratings in both categories by 5.61 percent per year. The portfolio also outperformed a portfolio of firms with high employee satisfaction alone by 1.6 percent per year.

This suggests a “synergy between ESG and employee satisfaction,” Yoon says. “In my view, it’s likely that ESG motivates employees and makes them more productive. And it makes a lot of sense: you need hard-working employees who buy into the firm’s vision in order to grow.”

4. Do Consumers Care about Ethical Products?

Investors and employees are one thing, but what about the shoppers at the store. How much do they care about morality when deciding which product to grab? Here, research findings have been mixed, with some researchers dismissing the idea of an ethical consumer altogether.

This prompted Jacob Teeny, an assistant professor of marketing, to dig deeper. Maybe the issue was that morality is very much in the eye of the beholder, he posited. Indeed, in one paper, he and colleagues reviewed previous studies on consumer morality and saw that researchers often assumed that certain product attributes, such as being eco-friendly or cruelty-free, were universally considered moral by consumers. But this is not always the case.

A better approach, he and colleagues discovered in a second piece of research, is to examine the effect of morality on consumer preferences only when the researchers know if the consumer perceives a certain attribute to be moral or not. Results of several studies using this method showed that consumers do, indeed, care if a product feels ethical to them.

“Morality does matter,” Teeny says. “Consumers are consulting their ethical beliefs when they make purchasing decisions.”

Presumably, customers who gravitate toward eco-friendly products still want those products to work. Yet past research has suggested that “green” options are often thought to be inferior to traditional versions, something known as the “sustainability liability.”

Marketing professor Alexander Chernev and a coauthor were skeptical that this sustainability-liability effect is as prevalent as implied by prior research. Across several studies, they found that sustainability is likely to have the opposite effect, strengthening rather than weakening consumers’ product-performance beliefs. They argue that this occurs because sustainability tends to produce a halo effect that can weaken and even override consumers’ belief that sustainability comes at the expense of product performance. They further propose that this halo effect stems from consumers’ evaluation of the moral undertones of the market actions and their view of the company as a moral agent engaged in prosocial behavior.

The researchers argue that these findings suggest two strategies for managers to increase how customers perceive the performance of sustainable products. First, because the sustainability halo stems from people’s beliefs about the company as a moral agent, associating the sustainable benefits with the company rather than with its products can help bolster perceived product performance. Second, emphasizing the societal benefits of sustainability can cause consumers to view the performance of sustainable products as being equal to or even more effective than products made using traditional methods

“This means companies no longer need to avoid investment in sustainable technologies in the mistaken belief that sustainability will hurt the perception of their products,” Chernev says. “Indeed, sustainable products can have a positive impact on sales.”

5. Activist Actions Matter, Too

What about the opposite of all these positive actions? When companies fail to act ethically, do activist campaigns against them—such as customer boycotts—force change, or hurt their bottom line?

This question has long intrigued Brayden King, a professor of management and organizations. In one paper, he looked at how often boycotts are successfulin eliciting a change from the targeted company. The key, he found, was when boycotts garnered national media attention. In those cases, activists got some sort of concession from the company 25 percent of the time.

In later research, he found that, contrary to popular opinion, boycotts didn’t do much in terms of getting customers to abandon a particular product. Instead, activists’ power comes from shining a spotlight on a company, which can make investors wary of potential problems and long-term risks. King and a coauthor found, on average, a 1 percent drop in stock price within a 26-day period of a protest targeting a company.

“Protests are a kind of information signal that cause people to pay attention to an issue, or maybe rethink an issue,” King explains. “It causes investors, policymakers, executives and the general public to look at that organization in a different way.”

Featured Faculty

Assistant Professor of Accounting & Information Management

CME Group/John F. Sandner Professor of Finance; Co-Director, Financial Institutions and Markets Research Center

Assistant Professor of Marketing

Professor of Marketing

Max McGraw Chair in Management and the Environment; Professor of Management & Organizations

About the Writer

Emily Stone is the senior editor at Kellogg Insight.

Most Popular This Week
  1. One Key to a Happy Marriage? A Joint Bank Account.
    Merging finances helps newlyweds align their financial goals and avoid scorekeeping.
    married couple standing at bank teller's window
  2. Take 5: Yikes! When Unintended Consequences Strike
    Good intentions don’t always mean good results. Here’s why humility, and a lot of monitoring, are so important when making big changes.
    People pass an e-cigarette billboard
  3. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  4. Will AI Eventually Replace Doctors?
    Maybe not entirely. But the doctor–patient relationship is likely to change dramatically.
    doctors offices in small nodules
  5. Entrepreneurship Through Acquisition Is Still Entrepreneurship
    ETA is one of the fastest-growing paths to entrepreneurship. Here's how to think about it.
    An entrepreneur strides toward a business for sale.
  6. Take 5: Research-Backed Tips for Scheduling Your Day
    Kellogg faculty offer ideas for working smarter and not harder.
    A to-do list with easy and hard tasks
  7. How to Manage a Disengaged Employee—and Get Them Excited about Work Again
    Don’t give up on checked-out team members. Try these strategies instead.
    CEO cheering on team with pom-poms
  8. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  9. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
  10. The Appeal of Handmade in an Era of Automation
    This excerpt from the book “The Power of Human" explains why we continue to equate human effort with value.
    person, robot, and elephant make still life drawing.
  11. 2 Factors Will Determine How Much AI Transforms Our Economy
    They’ll also dictate how workers stand to fare.
    robot waiter serves couple in restaurant
  12. When Do Open Borders Make Economic Sense?
    A new study provides a window into the logic behind various immigration policies.
    How immigration affects the economy depends on taxation and worker skills.
  13. Why Do Some People Succeed after Failing, While Others Continue to Flounder?
    A new study dispels some of the mystery behind success after failure.
    Scientists build a staircase from paper
  14. Sitting Near a High-Performer Can Make You Better at Your Job
    “Spillover” from certain coworkers can boost our productivity—or jeopardize our employment.
    The spillover effect in offices impacts workers in close physical proximity.
  15. How the Wormhole Decade (2000–2010) Changed the World
    Five implications no one can afford to ignore.
    The rise of the internet resulted in a global culture shift that changed the world.
  16. What’s at Stake in the Debt-Ceiling Standoff?
    Defaulting would be an unmitigated disaster, quickly felt by ordinary Americans.
    two groups of politicians negotiate while dangling upside down from the ceiling of a room
  17. What Happens to Worker Productivity after a Minimum Wage Increase?
    A pay raise boosts productivity for some—but the impact on the bottom line is more complicated.
    employees unload pallets from a truck using hand carts
  18. Immigrants to the U.S. Create More Jobs than They Take
    A new study finds that immigrants are far more likely to found companies—both large and small—than native-born Americans.
    Immigrant CEO welcomes new hires
  19. How Has Marketing Changed over the Past Half-Century?
    Phil Kotler’s groundbreaking textbook came out 55 years ago. Sixteen editions later, he and coauthor Alexander Chernev discuss how big data, social media, and purpose-driven branding are moving the field forward.
    people in 1967 and 2022 react to advertising
  20. 3 Traits of Successful Market-Creating Entrepreneurs
    Creating a market isn’t for the faint of heart. But a dose of humility can go a long way.
    man standing on hilltop overlooking city
More in Finance & Accounting