How Consumer Demand for Ethical Brands Is Reshaping Investment Returns

Consumer behavior may be becoming increasingly relevant to the way investors evaluate companies. For people interested in socially conscious investing, we believe this creates an important question: Can the values consumers express through their purchases eventually influence the financial performance of the companies they support?

There is evidence that products marketed around sustainability have experienced meaningful growth. According to the NYU Stern Center for Sustainable Business’s Sustainable Market Share Index, products marketed as sustainable achieved a five-year compound annual growth rate of 9.9%, compared with 6.4% for conventional products in the period covered by its 2023 analysis. Sustainable products also accounted for approximately one-third of consumer packaged goods growth despite representing less than one-fifth of market share.

Source: NYU Stern Center for Sustainable Business

Sustainable Market Share Index research

We believe trends like these may matter to investors because consumer demand can potentially affect a company's sales, competitive position, brand strength, and ultimately its financial results. That does not mean ethical companies will automatically generate better investment returns. It may mean, however, that understanding changing consumer preferences can potentially become one part of fundamental investment analysis.

Consumers Are Putting Some Values Into Their Purchasing Decisions

There can sometimes be a difference between what consumers say they value and what they actually purchase. Research using purchasing data may therefore provide useful context.

A joint study by McKinsey & Company and NielsenIQ examined consumer spending across multiple consumer packaged goods categories. The researchers found that products making environmental, social, and governance-related claims averaged 28% cumulative growth over the five-year period studied, compared with 20% for products without those claims. Products with ESG-related claims accounted for 56% of the growth observed in the categories examined.

Source: McKinsey & Company and NielsenIQ

Consumers care about sustainability and back it up with their wallets

We believe this is particularly relevant to socially conscious investing because it suggests that certain sustainability-related characteristics may have commercial relevance rather than existing solely as expressions of corporate values.

The relationship is not necessarily simple. A sustainability claim by itself may not make a product successful, and consumer preferences can potentially change. Price, quality, convenience, competition, economic conditions, marketing, and many other factors may affect purchasing decisions.

Some Consumers May Be Willing to Pay More

Consumer willingness to pay may also be important when considering the potential financial implications of ethical or sustainable business practices.

PwC's 2024 Voice of the Consumer Survey reported that 80% of consumers surveyed said they were willing to pay more for sustainably produced or sourced goods. The survey reported an average stated premium of 9.7% for goods meeting certain environmental criteria.

Importantly, PwC also cautioned that stated willingness may not necessarily translate into actual spending because of inflation, economic volatility, and cost-of-living pressures.

Source: PwC, 2024 Voice of the Consumer Survey

Consumers willing to pay sustainability premium

We believe that distinction matters. Socially conscious investors may want to look beyond surveys and examine whether consumer preferences are actually reflected in revenue growth, customer retention, pricing power, or other measurable business outcomes.

How Consumer Demand Could Reach Investment Returns

The connection between buying an ethical product and earning an investment return is not direct.

Investor.gov explains that numerous factors can affect a stock's price, including company management, product strength, consumer demand, economic changes, labor and supply-chain costs, and changing investor preferences.

Source: U.S. Securities and Exchange Commission, Investor.gov

Introduction to Investing

This means consumer demand is one factor among many.

We believe a company that successfully responds to changing consumer preferences could potentially strengthen revenue opportunities or its competitive position. Conversely, we believe a company that becomes disconnected from the preferences of its customers could potentially face business risks.

For socially conscious investing, this can create an interesting intersection between values and traditional financial analysis. An investor may care about how a company treats workers, animals, communities, or the environment for ethical reasons. At the same time, consumers may consider some of those same issues when choosing where to spend their money.

When those preferences translate into actual purchasing behavior, we believe they may become financially relevant considerations worth examining.

Ethical Demand Does Not Guarantee Better Returns

It is important not to confuse consumer trends with guaranteed investment performance.

Investor.gov states that stock prices can move both up and down and that there is no guarantee that a company will grow or perform well.

Source: U.S. Securities and Exchange Commission, Investor.gov

Stocks: Benefits and Risks

The SEC's Investor.gov also specifically cautions investors about ESG-focused funds. According to its ESG Funds Investor Bulletin, ESG practices may cause a fund's performance to differ, either higher or lower, from the broader market or comparable funds that do not use similar ESG practices.

Source: U.S. Securities and Exchange Commission, Investor.gov

Environmental, Social and Governance Funds Investor Bulletin

We believe this is an essential part of any discussion about socially conscious investing. Choosing investments based partly on environmental or social considerations should not be presented as a strategy that automatically produces superior returns.

Instead, we believe investors can potentially evaluate values-related factors alongside traditional considerations such as valuation, profitability, financial strength, competitive position, management, risk, and portfolio diversification.

Ethical Consumption Is Broader Than Environmental Issues

Socially conscious investing may also involve more than climate or environmental concerns.

A 2023 Statista Consumer Insights survey of U.S. adults found that 46% of respondents identified environmentally friendly packaging as important to sustainable consumption, while the same percentage identified consideration of animal welfare as important.

Source: Statista Consumer Insights

Where Do U.S. Consumers Stand on Ethical Consumption?

Investor.gov similarly explains that ESG investing can involve environmental factors, relationships with people and society, community investment, corporate governance, and executive compensation.

Source: U.S. Securities and Exchange Commission, Investor.gov

Environmental, Social and Governance Investing

We believe this broader perspective can help investors think beyond labels. A company might perform well in one area while conflicting with an investor's priorities in another. For this reason, socially conscious investing may require looking beneath broad sustainability or ESG terminology and examining what a company actually does.

Looking Beyond the Label

For investors, the larger opportunity may be to understand where consumer behavior, company fundamentals, and personal values intersect.

We believe growing demand for certain ethical and sustainable products could potentially create opportunities for companies that successfully respond to those preferences. At the same time, ethical positioning alone may not make a company financially attractive, and sustainability-related investment criteria can potentially cause a portfolio to perform differently from the broader market.

At Holistic Finance, we believe socially conscious investing can involve looking at both sides of that equation. The goal is not simply to identify companies associated with an ethical label. We believe investors can consider whether a company's practices align with their personal values while also evaluating the financial characteristics, risks, and role that investment could have within a broader financial plan.

Consumer demand may continue to evolve, and companies may evolve with it. For investors who want their portfolios to reflect what matters to them, we believe paying attention to those changes can potentially provide another lens through which to evaluate investments.

Ultimately, socially conscious investing does not have to mean choosing between personal values and financial analysis. We believe it can mean thoughtfully considering both.

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Disclosures

This material is for informational and educational purposes only and should not be construed as individualized investment, tax, or legal advice. Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Sustainable, and ESG and values-based investment strategies may use different methodologies and may perform differently from the broader market or other investment strategies. Such strategies may also limit the securities or industries available for investment. Investors should consider their individual objectives, risk tolerance, financial circumstances, and preferences and consult with their financial professional before making investment decisions. The discussion of sustainable investing in this article is intended to describe considerations that some investors may incorporate into their investment decisions. It does not represent a specific investment strategy or guarantee that any particular investment or portfolio will satisfy an investor’s environmental, social, ethical, or other personal preferences. Advisory services are offered through Holistic Finance LLC an SEC Investment Advisor. Holistic Finance LLC is not affiliated with or endorsed by the Social Security Administration or any government agency.

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