How NGO Activism Can Move the Dial for Sustainability

Beyond making “noise”, NGOs are making real impact by influencing companies to act more responsibly.

Amid pressure to improve their environmental, social and governance (ESG) performance, some companies have made misleading or false claims about their actions or ambitions. In 2023, TotalEnergies made misleading claims related to its “climate-neutral” heating oil. As a result, it had to revise its advertising.

The turnaround by the oil company was triggered by Climate Action Germany. For decades, non-governmental organisations (NGOs) have stepped up to “police” companies before other stakeholders did. These activists have been scrutinising companies for signs of greenwashing or any form of environmental and social-washing (E&S-washing). Their campaigns have targeted large, visible companies in industries from fashion to food, and oil and gas.

In fact, in a global survey among sustainability experts, NGOs emerge as the single greatest contributor to sustainable development over the past decades, ahead of financial institutions, institutional investors or governments. However, the impact of their work, campaigns and lobbying is not well understood.

Unearthing untruths

Thanks to the efforts of NGOs over the years, they have produced a wealth of insights, including into what ESG topics companies “wash”, and how, when and where they do it. These insights were not previously documented, especially since holding errant companies accountable can be challenging and long drawn.

In a study, my co-authors* and I explored the implications of NGO actions on companies. We examined a global sample of over 1,200 allegations by 329 NGOs against 287 publicly listed firms. These allegations targeted misleading or false corporate claims relating to E&S issues. In the context of our research, “E&S-washing” refers to misrepresentation of corporate E&S-related risks, practices and impacts to make them appear more favourable than they are.

For example, an energy firm may claim to focus on renewable resources but invests heavily in oil and gas exploration. In other cases, firms’ practices were inconsistent with public pledges or they made outright false statements, among other issues (See ways of E&S-washing in figure below).

In terms of the E&S issues they “wash”, the most frequently identified claims related to firms’ impacts on climate change (30 percent of all allegations), consumer health benefits (22 percent), and waste handling (11 percent). Other allegations related to biodiversity, animal welfare, as well as employee rights and safety.

Further, we found that E&S-washing occurred most on product labels or packaging (25.3 percent of allegations), advertising (23.1 percent) and public relations campaigns (13.3 percent). The fact that E&S-washing was less prevalent in sustainability reports, financial filings and presentations pointed to the need for scrutiny beyond investor-focused communication channels.

Importantly, about 42 percent of alleged E&S-washing were targeted at consumers, which is cause for concern. Consumers act as a critical market mechanism, incentivising firms to improve their ESG performance by switching from less to more sustainable products. But this mechanism fails if consumers act on misrepresented information.

Real impact of NGO campaigns

To understand the real impact of NGO campaigns, we examined stock market, media and corporate reactions to E&S-washing allegations. We observed an average 0.34 percent decline in stock returns within three days of an allegation. This market reaction was significantly more pronounced when allegations were associated with financially material aspects of the business that can affect future revenues, costs or risks.

Notably, companies with higher ownership by institutional investors – who are subject to stewardship codes – experienced a greater fall. This is not surprising, since these codes are meant to enhance corporate sustainability by making institutional investors more attentive to E&S issues in their portfolio firms.

The fall in value may reflect investors’ concerns over future reputational and legal costs or actions by regulators. Experience shows that these are valid concerns; E&S-washing and violating sustainability laws have proven to be expensive. Some of the biggest fines have been imposed on Volkswagen (US$34 billion) and Toyota (US$150 million), while Lululemon is facing a class action lawsuit for allegedly misleading consumers with its “Be Planet” campaign.

The media, on the other hand, responded with an increase in news coverage around these allegations. The number of negative E&S news articles over the three-day window after an allegation increased by 14.6 percent (compared to the three days before). The effect was greater when the issue raised was linked to a financially material topic. However, companies tended not to respond to the media, reacting directly to the press only in 10 percent of the cases. Even when they did, they were less likely to respond in a conceding manner to accusations over material E&S dimensions.

The more important question is whether E&S allegations result in real change in the companies’ operations. To shed light on this, we examined if climate-washing allegations led to companies reducing their Scope 1 carbon emissions. We found that emissions fell by 5 to 7 percentage points (compared to companies not facing allegations). More significant reductions were seen in companies with high ownership by investors subject to stewardship codes. Specifically, the carbon emissions of companies with high stewardship ownership (90 percent) fell by 5.8 to 7.6 percent after climate-washing allegations.

This suggests that NGOs are catalysts that influence investors to engage portfolio firms – or even divest – in response to their allegations.

Size and influence matters

It emerged in our study that size and influence are important on two dimensions. First, E&S allegations tended to fall on companies that are larger, more valuable, more visible, receive more press coverage and are consumer-facing. As expected, those with greater environmental impact, such as oil and gas companies, were common targets of NGO allegations.

At the same time, the outcomes of campaigns against errant companies were affected by the size and influence of the accusing NGOs, often linked to their geographic reach and international operations. Specifically, allegations by more influential NGOs led to a bigger fall in stock returns of the companies in question. These companies were also more likely to issue a corporate press response in a conceding way.

Moreover, the influence of NGOs could extend to the regulatory sphere when they call on government authorities, such as advertising regulators and competition authorities, to take punitive action.

Catalyst for sustainable impact

Naturally, companies are driven to make profits and increase shareholder value. But if companies do so at the expense of society and the environment, they may find themselves in the crosshairs of NGOs. Nevertheless, NGOs are a necessary ingredient to bring about positive change by catalysing engagement between the company, investors and other stakeholders.

Corporate boards are seeing the need to manage pressure exerted by NGOs and paying attention to their concerns and allegations against the companies they oversee. To avoid allegations, directors are incentivised to improve corporate practices and may even engage NGOs proactively. One example of active engagement is Nike working with Greenpeace to create a new policy to ensure that leather suppliers do not source leather from cattle raised in the Amazon biome.

In addition, NGOs can complement regulatory efforts by providing invaluable insights. Since NGOs scrutinise a broader range of disclosure outlets than regulators and standard setters do, financial market regulators in Europe are using NGO reports to detect corporate greenwashing. In addition, the European Security Market Authority is relying on NGO campaigns to inform government regulations.

Our results show that scrutiny by NGOs has real effects on stock prices, media reactions and corporate E&S practices. Importantly, NGOs are instrumental in channelling funds to companies that bring about the desired environmental and societal impact. In the belief that businesses will “follow the money”, ESG investing has been the financial markets’ answer to steer companies towards more responsible operations. But alone, it is not enough.

The investors, employees and customers of today are increasingly concerned about the ESG characteristics of the companies they invest in, work for and transact with. And so, it is important that NGOs, as part of the ecosystem, continue to play a role in steering companies towards not only greater accountability, but also transparency.