Consumer belief is the riskiest asset on the balance sheet, argue Goutam Challagalla and Frédéric Dalsace. The real question is whether customers would buy it anyway
For more than a decade, ESG-linked funds and corporate sustainability strategies have run on the same quiet assumption: spend more on sustainability, and the market will eventually reward you for it. The problem, however, is that this theory is more an article of faith than an investment thesis.
At issue is the link between “spend” and “reward,” which has rarely been tested with any rigour. And, where it has been tested, the results are uncomfortable. Sustainability impact does not reliably translate into sustainability profit. For investors trying to separate genuine value creation from expensive virtue signalling, that gap is the whole story.
The premium that was never there
Let’s start with the most basic assumption: customers will pay more for sustainable products. The data simply doesn’t support it as a general rule. Across most categories, sustainability does not result in a durable price premium.
In the real world, consumers operate with a limited sustainability budget. Having paid extra for organic food or ethical clothing, they’re often unwilling or unable to pay a further premium for green detergent or sustainable furniture. The budget gets allocated once, and competing sustainable products end up competing for the same constrained pool of willingness-to-pay, not creating new demand.
This has direct implications for how investors should read corporate sustainability claims. A pricing strategy that depends on customers absorbing a “green premium” across the board is, in our analysis, a strategy built on sand. Companies that have pursued this path, for example by branding sustainable variants as standalone premium line, tend to see disappointing volumes. That’s not because consumers don’t care, but because the trade-off being asked of them is the wrong one.
“Across most categories, sustainability does not result in a durable price premium”
Why impact doesn’t equal profit
Most corporate sustainability strategy still runs on what we’d call the traditional model: sustainability investments produce sustainability impact, full stop. The business case is treated as a loose, multi-year promise: invest now and, somehow, profitability follows.
We think this explains a great deal of the disappointing financial performance investors have observed from heavily ESG-weighted portfolios and sustainability-led corporate strategies. The investment and the payoff are only loosely coupled, mediated by reasons that are rarely specified, let alone measured accurately. Compounding this, greenwashing has become endemic enough that customers – and, increasingly, regulators – discount sustainability claims by default.
Research published in Harvard Business Review found that 42% of green claims examined in Europe were false, deceptive, or exaggerated. When nearly half of the market’s sustainability messaging is unreliable, the credibility tax on all sustainability claims rises, including the legitimate ones.
That’s a market failure with direct earnings implications: marketing spend on sustainability increasingly fails to convert, while regulatory and litigation risk around those same claims rises. There’s a further wrinkle that should concern any investor doing their diligence work: in some product categories, sustainability claims actively function as a liability. Where performance and strength matter to the customer sustainability framing triggers an assumption of reduced efficacy. Cleaning products are a classic example of that. Selling a product as a greener alternative paradoxically turns customers away, since greener here is associated with less efficacy, and therefore less cleanliness.
In one controlled study, an organic-labelled soap dispenser was used more liberally than an identical unlabelled one, because users assumed it was weaker. Plant-based meat has faced a related dynamic: products marketed primarily on health and environmental grounds have struggled against an underlying consumer suspicion that sustainable means compromised on taste.
None of this means sustainability is bad for business. It means sustainability bolted onto the wrong product, in the wrong category, with the wrong message, actively destroys value rather than creating it.
“Ask the question: does this sustainability investment make our product better for the customer on performance, on cost, or on both?”
The mechanism that actually works: The Resonance Bridge
So what does work? Our research points to a small set of companies, which we call “Clean Winners”, which have inverted the entire model. Instead of asking, “how much sustainability impact can this investment generate?” they ask a much sharper question, “does this sustainability investment make our product better for the customer on performance, on cost, or on both?
In our book, we call the resulting mechanism the Resonance Bridge. It replaces the loose impact-to-profit promise with two explicit and measurable links. First, does the sustainability investment create real customer value, i.e. better performance, lower total cost, more convenience? Second, can the firm capture part of that value through volume, pricing, or share gains? If both links hold, sustainability investment converts into what we would call a genuine return on sustainability investment, or ROSI, a far more tractable metric for investors than aggregate ESG scores.
The case studies are instructive precisely because they span categories and business models. Finish dishwasher tablets were engineered to eliminate the need for pre-rinsing, a step that wastes up to 75 litres of water per cycle versus roughly 10 litres in the machine itself. The sustainability benefit is real – less water is needed – but that’s not the selling point. The selling point is that customers save time and cut their water bills. The result was an 11% increase in sales volume and recovered market share.
Electrolux redesigned its washing machine drums to be gentler on fabric, extending garment life. The company’s own analysis suggests that extending clothing lifespan by nine months reduces the carbon, waste, and water footprint of those garments by 20–30%. But the customer doesn’t need to know or care about any of that to buy the machine. They’re buying clothes that will last longer and look better, which also happens to save them money.
John Deere has moved from selling equipment to selling farm productivity, using precision technology to cut input use. Its See & Spray system delivered average herbicide savings of 59% for customers in 2024. This is a number that matters enormously to a farmer’s operating margin, with the emissions reduction arriving as a by-product of the cost saving, not the other way around.
And at the corporate level, Schneider Electric has roughly doubled its R&D spend over the past decade, up over 12% in 2023 alone, to more than €1.2 billion. It now attributes around three-quarters of its revenue to products tied directly to the energy transition. Sustainability isn’t sitting alongside the core business. Rather, sustainability is functioning as the primary innovation engine of the business itself.
The investor takeaway
For investors and analysts evaluating corporate sustainability claims, the practical implication is to stop treating sustainability investment as a single undifferentiated line item and start asking the Resonance question directly: is this specific investment designed to create measurable customer value independent of whether the customer cares about sustainability at all? If a company’s sustainability story only works if the customer is persuaded to care, that’s a strategy resting on the most volatile and least controllable variable in the entire model, namely consumer belief.
The companies most likely to convert sustainability spend into durable earnings are the ones that have made sustainability optional. It becomes embedded so deeply into product performance and cost structure that the customer would buy the product even if they’d never heard the word sustainable at all. That’s a far more investable thesis than impact for its own sake.
Further reading
Clean Winners: Sustainability Strategy That Puts Customers First by Goutam Challagalla and Frédéric Dalsace is out now, published by Harvard Business Review Press, priced £25.
About the authors
Goutam Challagalla (below right) is the Dentsu Group Chair of Sustainable Strategy and Marketing at IMD Business Cchool in Lausanne, Switzerland. He is the Director of IMD’s Advanced Management Program, Integrating Sustainability into Strategy program, and Strategy Governance for Boards.
Frédéric Dalsace is a Professor of Marketing and Strategy at IMD. Prior to IMD, he was a professor at HEC Paris, where he held the Social Business Chair, sponsored by Danone, Renault, and Schneider Electric. Before academia, Dalsace worked in industry at Michelin and for McKinsey & Company.
