Boys will be boys – stigmatised firms given social licence to pollute

New research published in the Journal of Management Studies shows that firms in industries seen as “sinful” (e.g. tobacco, alcohol, gambling) or “dirty” (e.g. oil and gas, mining), are buffered from the full negative commercial consequences of greenwashing, a nefarious business practice by which firms misrepresent themselves as more socially and environmentally responsible than they really are.

The study shows that this buffer exists because consumers already regard these stigmatised firms as untrustworthy and so expect them to have shady business practices – so much so that compared to their non-stigmatised counterparts they are seen to have greater integrity when they engage in greenwashing.

Meanwhile, companies trading on their green credentials (e.g. renewable energy firms) which are found to be engaging in greenwashing suffer significant commercial consequences in comparison, as consumers come down harder on them for the same transgression.

In the first study, researchers tracked 7,365 firms across 47 countries over a 15-year period, investigating how the market responds to firms in stigmatised industries when they are caught greenwashing.  

It found that the market does penalise firms for greenwashing, reflected mainly by lower sales. However, market penalties only applied to firms in industries that were not seen to be stigmatised. In other words, firms in stigmatised industries were relatively immune to the market consequences of greenwashing.

In a second study, a controlled experiment with 434 consumers was conducted to determine why – from a consumer psychology perspective – stigma insures companies against the market consequences of greenwashing. Here, it was shown that the reason is because consumers these firms as untrustworthy in the first place and so expect this sort of behaviour.

This research has at least three key implications for managers, regulators, and civil society. First, it has long been assumed that the market frowns upon greenwashing, but concrete data that supports this assumption is hard to come by. This research offers rare evidence that greenwashing has real financial costs for firms in the marketplace. It is also the first to document the psychological driver of this market phenomenon: greenwashing makes firms less trustworthy in the eyes of consumers.

Second, this research shows that unlike firms in stigmatised industries, companies in “clean” industries need to be careful to “walk their corporate social responsibility talk.” Just as consumers are lenient with stigmatised firms when it comes to greenwashing, they come down especially hard on “clean” companies for doing the same thing.

Third, this research reveals that stigmatised firms have a competitive advantage when it comes to externalising business costs on to society and the natural environment. As a result, they can play fast and loose with their corporate social responsibility commitments and make empty promises with relative impunity. Those who seek to rely on the “free hand of the market” to regulate greenwashing would do well to take note.

In a word, no. These findings should not be misinterpreted to suggest that the market will not hold “sinful” or “dirty” firms to account for greenwashing — only that their punishment for doing so will not be as severe as their non-stigmatised counterparts.

Ultimately, this research shows that stigma is more than just a business liability, but that it is also an asset because it buffers firms from the negative market consequences of greenwashing – and likely other forms of wrongdoing as well. At the end of the day, though, while stigma may have this silver lining, it is still a rather dark cloud.