Greenwash may backfire during recession. <br>Photo by <a href="">velo_city</a> (<a href="">CC</a>).
Greenwash may backfire during recession.
Photo by velo_city (CC).

Policy Innovations Digital Magazine (2006-2016): Briefings: Growing Green During Downturn

Apr 22, 2008

Earth Day used to be celebrated primarily by environmental activists, but now companies use the annual event to reach out to eco-conscious consumers.

For every traveler flying with Virgin America on April 22, the company is donating $3 to environmental restoration projects in California. Companies such as Dell, Banana Republic, and Wal-Mart have also jumped on board the Earth Day bandwagon with environment-friendly promotions.

For some, this constitutes corporate social responsibility (CSR). To Steven Addis, CEO of branding firm Addis Creson, it's often "greenwashing." He calls it the 95-5 rule: 5 percent green business and 95 percent green public relations. Instead of making environmental improvements, companies sometimes use the guise of CSR to spur otherwise low sales.

The CSR mantra—doing well by doing good—doesn't necessarily translate to profit maximization. As a result, with the threat of recession, the emphasis on green in business is shifting from the environment back to dollars. According to the Guardian, strategy consultant SustainAbility is already seeing a decrease in CSR budgets, which is expected to continue for up to two years. Others argue that companies that have already invested in CSR will be unlikely to cut back and lose the competitive edge that their social conscience gives them.

Investment in so-called vice industries, like tobacco, gambling, and alcohol, has long been considered a recession-proof strategy. While ethics may not be as addictive as vice, fair trade and organic products have been likened to luxury goods, which are less affected by a recession than many other consumer products. Analysts have noted the tendency of ethical funds to experience smaller losses than mainstream funds during economic downturns due to investors' commitments to concerns other than price.

Companies that consider long-term sustainability in their business operations may even be better risk managers and therefore less likely to suffer during a recession. IBM recently issued a report surveying 250 business leaders on how to attain sustainable growth through corporate social responsibility. According to the report, more than two-thirds of those surveyed are focusing on CSR initiatives to create new revenue streams, and more than half believe they are already seeing the competitive advantage that CSR gives them over top rivals.

Policy Innovations spoke recently with George Pohle, coauthor of the report and global leader of the IBM Institute for Business Value, about whether these findings would hold up during a financial crisis. "CSR may actually be more important to organizations in a recession," he said.

Initiatives that are mostly public relations, or that are not integrated into a company's core business strategy, are likely to be cut as discretionary expenses. But those that offer access to new markets and differentiation against the competition, added Pohle, are especially critical during an economic downturn.

"Businesses that have strategically aligned CSR programs may, in fact, grow investment in CSR because it can offer significant operational cost savings to the business," said Pohle.

Hilton Hotels recently announced that, since launching an energy saving initiative in Africa and Europe in 2006, the chain has reduced carbon emissions by nearly 11 percent and saved more than $9 million. "We absolutely believe companies can maximize profits by 'doing good,'" said Pohle. "In fact, it's perfectly consistent with CSR."

Economists have predicted that the green sector of the U.S. economy will continue to grow despite recession, and clean energy industries could potentially create millions of jobs. Eco-friendly construction and energy companies in California are currently serving as a "pathway out of poverty," training and hiring at-risk youth, unemployed individuals, and those with low-end jobs.

At the start of the last economic downturn in 2001, John Quelch, associate dean of Harvard Business School, said, "Only when you get into a recession will you know whether your values will hold up." Companies that have begun to reap the benefits of integrating social responsibility into their core objectives may find the greatest risk they face during a recession is quitting on CSR while they're ahead.

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