In recent years, with the growing global awareness of climate change, many organisations have faced increased pressure from both the public and government to adopt more environmentally sustainable practices. This article explores Frank Weikai Li, Assistant Professor of Finance’s research into how consumers affect an organisation’s Environmental, Social, and Governance (ESG) behaviour. It highlights that as consumers become more aware and concerned about ESG issues, companies must prioritise sustainable practices for ethical reasons and also to maintain their market position and profitability. Firms that fail to adapt may face severe long-term repercussions.

A definition of ESG

ESG refers to the three central factors used to measure an investment's sustainability and societal impact in a company or business. The environmental aspect covers how a company performs in terms of its effect on nature. This can range from assessing carbon emissions and strategies for reducing environmental impact, managing the use of resources like water and energy efficiently, and their management of waste products and pollution levels.

The social element looks at how organisations manage relationships with employees, suppliers, customers, and the communities where it operates, as shown in its labour practices, community engagement and active inclusion policies.

Finally, governance deals with a company’s leadership, audits, internal controls, and shareholder rights. This includes the board's composition, the diversity and independence of board members, ethical conduct policies against corruption and bribery, and transparency in reporting financial performance and governance practices.

Why is ESG important?

The most obvious factor that makes ESG so important to organisations is sustainability - specifically environmental sustainability. In light of the Paris Agreement to reach carbon neutrality by 2050, it’s imperative that organisations take active steps to reduce their emission. Beyond that, ESG policies also have significant business impacts. 

According to Asst Prof Li, ESG is becoming increasingly recognised as a critical factor in business strategy and consumer behaviour. A few things businesses should consider when deciding to prioritise ESG policies are:

1. Consumer behaviour: Consumers are becoming more conscious of a company's ESG performance when making purchasing decisions. A negative reputation regarding ESG issues can lead to decreased sales and revenue. Asst Prof Li adds,"If consumers do not want to buy or do business with you, then you face significant trouble in maintaining your revenue streams." 
   
   
2. Corporate reputation: Companies that prioritise ESG practices can build stronger reputations, fostering trust among consumers and other types of stakeholders. A strong ESG reputation can differentiate a company in a competitive market.
   
   
3. Risk management and compliance: Organisations that neglect their ESG responsibilities could face regulatory fines and penalties, especially in countries that are more serious about their pledges to the Paris Agreement. This can significantly impact their financial health. By following ESG standards closely, organisations can mitigate these financial risks that come with non-compliance.
   
   
4. Attracting investment: Investors are increasingly considering ESG factors when making investment decisions. Strong ESG performances can enhance a company's attractiveness to investors, while poor performance may lead to divestment. 
   
   
5. Talent recruitment: Organisations with strong ESG policies and commitments tend to be more appealing to potential employees, especially among the younger generation, who usually prioritise sustainability and social responsibility. Asst Prof Li notes: "Firms need to be careful to not just care about financial profit, they also need to invest sufficient resources to improve their ESG performance.”

The role of consumers on ESG Policies

According to Asst Prof Li, consumers play a significant role in shaping a company's ESG policies. Their awareness, preferences, and behaviours can directly influence corporate practices and decision-making.

Younger and more educated consumers tend to be more engaged with ESG issues. According to Asst Prof Li’s research, younger consumers tend to align their purchases with their values, particularly regarding sustainability and social justice. On top of that, education plays a crucial role; those with higher education levels tend to be more informed and concerned about ESG issues than those without higher education levels. Political affiliation also appears to matter; for instance, individuals who identify with progressive ideologies are generally more supportive of environmental initiatives compared to those with conservative views.

In his research, Asst Prof Li states that consumers on average consider a company's ESG reputation when making purchasing decisions. Organisations with negative reputations regarding its ESG practices could end up with consumers choosing to boycott its products or services, leading to a direct impact on revenue. 

Explains Asst Prof Li, “If a firm underperforms in ESG dimensions, they will gradually lose their market share to competitors who are better performing."

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What can organisations do?

Organisations to start taking proactive steps to address the effects of customer behaviour on their ESG policies. Asst Prof Li states several steps organisations can start making to address these concerns.

The first is acknowledging and addressing the issues. Organisations should openly acknowledge any negative incidents related to their ESG performance. This transparency helps build trust with consumers and can lead to allocating resources to address specific ESG issues, to improve labour conditions or environmental practices, for example. 

Another thing organisations can do is enhance their ESG performance. This may sound obvious, but organisations should actively work on improving their ESG practices, like enhancing labour rights in factories or reducing carbon emissions. This can involve investing in better working conditions or sustainable technologies and continuously monitoring their performance.

Finally, it is also important for organisations to engage with their consumers. “Organisations should educate consumers about their ESG initiatives and the positive impacts of their practices. This helps with their public perception and reputation, while making it easier to get feedback from your customer base.”

It can seem overwhelming when climate change is brought up. What Asst Prof Li’s research shows is that people still care about winning the fight against climate change - which means that ESG policies matter.

Asst Prof Li stays optimistic in the face of these climate challenges, believing that ESG is here to stay. “The severe consequences of climate change will only manifest in 30 or 50 years. So it’s not surprising that younger people care more about ESG issues. Younger people still believe in the fight against climate change. That's why I am quite optimistic about the future.”