The ESG Paradox: A Behavioural Study of Consumer Response to Firms’ ESG Engagement

This study explores the puzzle of why consumers are willing to purchase products from firms that engage in ESG activities, even when they are aware that companies may be strategically participating in “greenwashing.” We posit that consumers may perceive a firm’s costly ESG investments as a pledge of reputational capital, which we term the reputational collateral mechanism. Consumers rationally infer that the firm, in order to protect this valuable asset, has a strong incentive to maintain baseline product quality, thereby reducing perceived risk and increasing purchase intention. Based on survey data simulated using large language models (LLMs), we find that consumers indeed prefer products from ESG-engaging firms, even after controlling for altruistic attitudes. This suggests that prior empathy-based explanations cannot fully account for the observed effect, and that our proposed theory helps resolve this puzzle. Additional cross-sectional findings indicate that the positive relationship is more pronounced (1) for consumers with a higher level of analytical cognition, and (2) for products characterised by high information asymmetry (e.g., experience goods such as education). Collectively, this study sheds light on the enduring link between corporate ESG activities and consumer purchasing behaviour, offers a refined theoretical perspective, and highlights the strategic value of reputational investment for firms, even in skeptical markets.