Some of the largest listed companies in the US have lower environmental, social and governance (ESG) reputations than the average company in the country, and this underperformance is costing them potential sales.
Those are the findings of new research from reputation analysis company RepTrak. It has analysed millions of perception and sentiment data points related to ESG to create an index ranking for US companies.
The research shows a downward trend on ESG reputations for all US companies in the post-pandemic period and finds that companies in the Nasdaq 100, the largest non-financial corporations listed on the Nasdaq stock index, have a lower ESG perception ranking than the average US company.
Listed companies are under greater pressure to project a positive ESG record given their disclosure requirements, yet Stephen Hahn, global executive vice-president at RepTrak, suggests that these efforts risk being seen as “ESG-washing”.
“There were a lot of empty promises made during and in the wake of Covid,” he says. “What it did was amplify ESG as being disproportionately important in people’s minds. It created a set of expectations, and when you create expectations you need to fulfil them. If you don’t, your reputation declines.”
Top-ranked Nasdaq 100 companies for ESG reputation
RepTrak created an ESG reputation ranking for the 70 corporations listed on the Nasdaq 100 with the highest familiarity to the public. The results show none of the largest consumer-facing tech companies ranking in the top 20 for ESG reputation. Instead, retail giant Costco Wholesale ranks number one.
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Facebook/Meta was the lowest-ranked in the index, with Alphabet (62nd), Amazon (51st) and Microsoft (47th) all ranking lowly. Nvidia was the only company to be in the top ten for both market capitalisation value and ESG score.
“NVIDIA, which is essentially a semiconductor company, has worked very hard to tell an authentic story,” says Hahn. “It has sustainability reports that are real. It has tangible goals associated with what it is trying to accomplish – and it is not overly ambitious.”
Hahn highlights that Nvidia has faced global supply chain challenges and strong competition, particularly from Intel, but has managed to achieve “incredible things in terms of sustainability” while prioritising its employees.
In contrast, Hahn says Facebook is “the poster child of what not to do”. He lists scandals related to Cambridge Analytica, data privacy and election interference as evidence that “Facebook is not practicing good self-governance”.
“Then on a more social context, it is certainly not perceived as a workplace culture that is all inclusive and welcoming and equitable”, says Hahn, who adds that environmentally Facebook has been “persona non grata and hasn't told an environmental story”.
Where companies are going wrong on ESG
RepTrak argues that companies leaned into communications strategies during 2020 and 2021 during the Covid-19 pandemic, but consumers expected them to deliver on those promises in 2022.
The 2022 economic and social environment has been challenging, with global inflation and the war in Ukraine adding to existing consumer worries such as stagnant wages, data privacy concerns and climate change, according to RepTrak.
The analysis suggests that because Nasdaq 100 companies are more visible, they are under greater scrutiny for their ESG standards than your average company. The ESG reputations of Nasdaq 100 companies have been tracking below the average for all US companies tracked by RepTrak for most of 2022.
The low scores for ESG reputation may be having material impacts on the performance of these companies. According to RepTrak’s research, perceptions of ESG performance are on average 86% statistically correlated to a company’s overall reputation, and that there is a 78% correlation between ESG scores and a consumer’s willingness to buy from it.
Historic RepTrak data suggests that low ESG scores result in a 10–20% willingness to buy for consumers, compared with a 60–67% willingness to buy from companies with a high ESG score. Its surveys also show that 36% of consumers have felt betrayed by what a company stands for, and 47% of those have stopped using a business as a result.
Hahn says its research shows that 63% of global consumers prefer to buy goods and services from companies that “stand for a purpose that reflects their values and beliefs” and will avoid those that do not.
“Some 90% of the companies in the Nasdaq are kind of misaligned,” says Hahn. “They have not fulfilled expectations, or they have not focused on the right things. Many of them have done the right things, but they have either inappropriately communicated them, or worse still, not communicated them at all.”
According to Hahn, consumers increasingly care about ESG and closely scrutinise the messaging companies on social and environmental issues. Companies who prioritise authenticity over big media campaigns driven by hyperbolic claims are the ones benefitting reputationally.
“The companies that rose to the top are the ones that just quietly got on with doing the right thing and found authentic ways of telling that story,” Hahn concludes.
Editor’s note: The original version of article appeared on our sister site Investment Monitor.