Amid increasingly stiff competition for capital, one way for a business to stand out is to make strong social impact pledges.
For example, companies can voluntarily commit to environmental impact goals in hopes of attracting sustainability-minded investors and lowering cost of capital. However, it isn’t easy to tell whether these commitments, in and of themselves, make a difference to the marketplace—or, for that matter, to the planet.
“In regular settings, it’s really hard to evaluate the real economic effect of providing environmental commitments, and also establish that in making the commitment, the company is catering to real stakeholder preferences as opposed to their own idiosyncratic preferences,” says Yi Cao, assistant professor of accounting at Costello College of Business at George Mason University.
Cao’s paper in Review of Accounting Studies capitalizes on a unique setting that helps isolate the impact of environmental commitments. It was co-authored by John (Jianqiu) Bai of Hong Kong Polytechnic University, Xiumin Martin of Washington University in St. Louis, and Chi Wan of San Diego State University. In 2018, leading crowdfunding platform Kickstarter added an optional “Environmental Commitments” section to project pages where creators could post about their sustainable practices (e.g., responsible sourcing, recyclable packaging, and/or low-emission manufacturing). The new feature was rolled out gradually across product categories, enabling the researchers to compare not only project-to-project differences, but also overall changes within entire Kickstarter verticals.
The researchers scraped information from Kickstarter pages to form a data-set comprising 173,874 observations of unique projects during the years 2016 to 2021. They also gathered data on a host of outcome variables, such as whether the project was successfully funded, how much money each project ultimately raised, how long it took for fully funded creators to deliver products to backers, etc.
The researchers found that, on average, about one-third of creators chose to declare an environmental commitment once doing so became possible in their category. Several of the largest categories (e.g., Design, Technology and Games) saw significantly higher take-up rates.
On the whole, projects that included environmental commitments were 13.2 percent more likely to be funded and increased the pledged amount relative to the funding goal by 8.7 percent.
Using Google BERT, a natural language processing model, the research team separated projects into two categories: those with largely local appeal, and those with a national market base. “We pre-trained the AI with all projects from 2010 to 2016 that had at least 50 backers, and measured the geographic dispersion of these projects’ backers traced by their IP address,” Cao explains.
The purpose was to spare the human researchers the tedious and painstaking work of hand-classifying every project in the data-set. The BERT results showed that national projects with eco-commitments received 62.2 percent more backers from more environmentally aware states—that is, states whose residents reported above-average levels of concern about climate change on the Yale Climate Opinion Maps—than local projects that had made eco-pledges.
For Cao, these findings add crucial nuance to the general idea that pledges of social responsibility help attract capital. In the Kickstarter example, projects of national scale benefited much more from eco-commitment because they were pitched to a larger and more diverse backer base, including environmentally aware consumers from other states.
Additionally, projects offering physical products, as opposed to intangible services, confronted tougher economic trade-offs resulting from e-commitment. “First and foremost, the Kickstarter creators want to know whether [e-commitment] will benefit them,” Cao says. “Because this is pretty costly, based on our analysis. It delays delivery and increases costs, because recycled and other eco-friendly materials, for example, are a little bit more expensive.”
The fact that entrepreneurs were clearly grappling with these economic challenges suggests that e-commitment amounts to more than mere “greenwashing.” “We find consistent evidence that when these small businesses are trying to access environmentally aware consumers through e-commitment, they do incur cost. It isn’t cheap talk. And that means that consumers are attracted by a genuine commitment, rather than lip service or a nice-sounding pitch,” Cao says.
In sum, Kickstarter’s e-commitment feature was a net improvement for the ecosystem, giving creators (especially those with national aspirations) access to an untapped source of consumer demand—namely, environmental awareness. At the same time, creators had to weigh the financial benefit against the increased costs of making good on environmental commitments.
Cao suspects that the same basic rules might apply to other types of pledges related to issues that animate large groups of consumers. “For example, AI is especially polarizing nowadays. You could appeal to consumers or investors who are polarized against the technology with a declaration that no AI was used in the creation of a product, etc. It could be anything where there are differing preferences, and a broader impact on the social perception of those preferences,” he says.