How non-profits push firms to walk their green talk

Not only do NGO advocacies call out greenwashing, but they also trigger financial and reputational fallout that forces companies to repent

Featured faculty: Janja Brendel
Written by Sally Ho

The global push for environmental, social and governance (ESG) compliance has driven firms to live up to responsible business practices, but this demand does not always go hand in hand with profits. Some firms take a shortcut by fabricating claims, which can be perplexing to spot for untrained eyes. For non-governmental organisations (NGOs), spotting fraud is one of their bread and butter.

A German non-profit, Deutsche Umwelthilfe, to name a few, has put an end to false and misleading sustainable claims of more than 100 companies. In the US, the California-based Earth Island Institute has sued global major food and beverage companies and other big brands for making baseless statements about the recyclability of their products.

“Armed with little more than evidence, social and environmental activists can successfully challenge corporate giants. NGOs, in particular, may force tangible changes in their environmental and social conduct,” says Janja Brendel, Assistant Professor at the School of Accountancy at the Chinese University of Hong Kong (CUHK) Business School.

“NGOs play a crucial role in advancing corporate sustainability, but their impact remains underexplored. At the same time, the growing prevalence of misleading environmental and social claims by corporations underscores the need to assess NGOs’ effectiveness as independent watchdogs.”

In a paper titled The value of NGO activism, Professor Brendel, in collaboration with Chen Cai at CUHK Shenzhen, Thomas Keusch at INSEAD, and Zacharias Sautner at the University of Zurich, explores what happens when NGOs accuse firms of misleading environmental and social claims and whether those accusations lead to meaningful change.

“We wanted to understand whether NGO campaigns targeting misleading environmental and social claims influence corporate behaviour and investor perceptions, given the growing sustainability concerns,” Professor Brendel adds.

“Armed with little more than evidence, social and environmental activists can successfully challenge corporate giants.”

Professor Janja Brendel

When watchdogs bark, markets listen

Professor Brendel and the team compiled 1,212 allegations filed by 329 NGOs across 24 countries targeting 287 publicly listed firms between 2011 and 2022. These target firms are typically large consumer-facing firms, such as food giants and apparel brands, whose public image is often closely tied to their marketing.

Overall, larger firms with more media coverage are generally more exposed. The data reveal that consumer services and goods firms face more allegations due to their direct customer interaction. Oil and gas firms are also targeted heavily, especially for climate-related claims. Most of the bogus claims didn’t appear in official reports filed with regulators, but in marketing materials by presenting products as greener than they actually are.

NGO campaigns rarely exist in isolation and can quickly ripple into public discourse. Stories picked up by news outlets often snowball across mainstream channels, turning NGO’s tweets or press releases into a reputational storm that companies can’t ignore. Soon after NGOs publish an allegation, the study finds a 14.6 per cent increase in negative ESG-related media coverage about the alleged firms.

Shareholders often act quickly. Within three days, the alleged company’s stock price fell by an average of 0.34 per cent, marking a meaningful dip for large firms. Being accused of making false environmental claims also makes their profits drop by 11.4 per cent compared to similar companies that weren’t accused, suggesting consumers’ negative reactions, possibly influenced by NGO reports.

The backlash is more damaging for the firms when the NGO has a strong reputation and the issue is considered financially material, which can affect the company’s profits, stock price, or overall value. For instance, severe pollution could lead to costly fines and human rights violations would trigger catastrophic lawsuits or customer distrust.

The most consequential result is that NGO campaigns can actually change corporate behaviours. In the years following a greenwashing allegation, firms reduced their direct emissions by about five to seven per cent compared to similar firms without allegations.

“Therefore, NGOs may enhance their approach by highlighting issues that can bring financial impact to the alleged firms while also strategically convincing climate-conscious institutional shareholders, leveraging their campaigns as a catalyst to amplify corporate accountability within the ownership structure,” Professor Brendel adds.

Lessons for consumers, companies, and investors

The study highlights NGO’s role as a fact-checker, since misleading claims appear mostly in marketing materials rather than formal reports, helping the public see past the buzzwords. NGO reports can also serve as valuable resources to gauge corporate accountability, as evidence-backed allegations can affect stock prices and hint at deeper governance issues.

“NGOs can complement regulators by scrutinising a wider range of corporate communications, especially consumer-facing ads and labels that fall outside formal reporting rules,” says Professor Brendel. “Their independent expertise and evidence-based allegations provide a crucial oversight, helping to ensure stakeholders have unbiased information.”

Furthermore, Professor Brendel anticipates a more interconnected system where NGO activism directly catalyses investor engagement and regulatory scrutiny, creating a feedback loop that pressures corporations. “Regulators like the European Securities and Markets Authority have declared the vital role of NGOs as indispensable watchdogs. We will probably see more regulators following suit, making use of the evidence collected by civil society.”

For companies, the findings can be interpreted as a clear warning. Overselling sustainability may not only tarnish their reputations but also trigger financial consequences. Unfortunately, some firms manage to find a loophole by shifting their carbon-intensive activities. While the alleged firms eventually reduce their emissions, the study finds their carbon emissions from the supply chain increase, suggesting that they relocate polluting industrial processes overseas.

This underscores a broader lesson. NGO activism can drive firms to reduce emissions, but lasting progress depends on the accountability of the shared ecosystem between civil society and regulators.