Professor Thomas P. Lyon

• Named for Fred (BBA ’47) and Barbara Erb who have committed $20 million to the Institute to date.

• Established in 1994 as a joint MBA/MS program between the Ross School of Business and the School of Natural Resources & Environment. Class of 2011 is our 17th!

• Research Programs– Erb Conferences– Erb Colloquium– Erb Post-Doctoral Scholars– Erb Doctoral Fellowships– Erb Doctoral Student Small Grants– Erb Faculty Fellowships

Erb Institute Overview

Fred and Barbara Erb

Erb MBA/MS Student Enrollment

Corporate Green Claims• Green advertising has doubled in recent years.• In addition, companies increasingly make specific

“green claims” about the firm or its products• Terrachoice Environmental Marketing (which

sponsors the Ecologo label), studied products in Big Box retailers, and found 2,219 products making 4,996 green claims.– This number was up 79% from previous year– 23.4% of the products have ecolabels

Greenwash

• TerraChoice found that in 2008, 99% of the green claims were false or misleading.

• Fortunately, matters improved in 2009.• Only 98% were misleading!

“The Six Sins of Greenwashing”

http://www.terrachoice.com/files/6_sins.pdf

Much Current Activity on Ecolabeling• Ecolabels are seen as a way to provide more

objective information than corporate self-claims• However, the proliferation of ecolabels worries

some observers, who fear consumers will become confused and overwhelmed

• Federal Trade Commission is revising its Green Guidelines. DEFRA in UK recently issued its revised Draft Guidance on Green Claims.

• Multi-stakeholder groups have formed– The Sustainability Consortium (TSC)– Packard Foundation, Walton Foundation, MARS– Keystone Center Green Products Roundtable (GPR)

• Conference organized by the Erb Institute June 17-19, 2010

• Mix of academics, industry, gov’t., NGOs• Representatives of TSC, Packard, GPR• Goal: To assess what we know and what we

don’t know about the impact (current and potential) of certification and labeling.

Years Ecolabels Were Launched

Source: Global Ecolabel Monitor, 2010.

Types of Organization Sponsoring Ecolabels

Source: Global Ecolabel Monitor, 2010.

Design of Ecolabels

Key Points1. Proliferation and competition among ecolabels has

both good and bad consequences.2. There is little hard evidence that ecolabels improve

environmental and social performance. 3. Small changes in label design can have big effects on

program impact.4. The B2B market, not consumers, is driving demand

for detailed information about the social and environmental attributes of products.

5. Limited transparency undermines credibility of many ecolabels.

Is Label Competition Good or Bad?• Label competition can be good when it helps meet the

needs of different market segments or drives labels to enhance their credibility.

• When for-profit labels enter to compete with NGO labels, environmental results can worsen.– Lax for-profit labels draw off demand from stringent NGO labels.

• Especially problematic when most firms have similar costs of greening.

• When consumers are uncertain of the meaning of particular labels, label competition performs poorly.– Weak labels may come to dominate the market– Good firms may decide not to get labeled

Little Hard Evidence on Ecolabel Impacts

• Blackman and Rivera (2010) find just 37 relevant studies of ecolabel impact in agriculture, tourism and fish and forest products.

• Only 14 of these use a reasonable counterfactual from which to measure impact. – 11 of the 14 examine Fair Trade and Organic certification, which means the impacts

of other ecolabels are especially under-studied.  • Of these 14, only 6 find evidence that the ecolabel had positive

impacts. • Caveat: these studies did not test whether certified producers increased

their market shares.

Label Design

• Exactly how labels are structured can have big impacts on their effectiveness.

• Over time, diffusion of best practices means that more and more products meet ecolabel standards. To encourage further innovation, labels much be upgraded

• Thus, labels should be designed to be compatible with dynamic upgrading.

Dynamics of EU Appliance Labeling

Dynamic Improvement

• In 2003, A+ and A++ were added.

• In 2009, European Parliament approved addition of A+++ too.

Performance of Alternative Labels

EPA Vehicle Label Revisions---What Does Each Option Communicate?

Demand Drivers• Consumer surveys typically find a large share of people claim a

willingness to pay (WTP) for sustainable products.• Evidence in practice is scarce.

– Typical finding is about 3% of customers will pay a premium.• Details influence WTP

– Private benefits vs. public benefits– Positioning of sales display– Whether there is a sales representative present– Whether other consumers observe your choice

• However, retailers and institutional buyers show a real preference for green products– Walmart’s drive for sustainability metrics for its suppliers

Information Processing• Consumers have limited capacity to process

label information– Little evidence that nutrition labels have

changed behavior• Large commercial customers can process

more complex information.– For example, architects responded more

positively to ads for home insulation if they included detailed life-cycle data

Limited Transparency

• Big Room/WRI found that – "over half of the ecolabels surveyed, including

some prominent ecolabels, were unreachable, difficult to reach, or uncooperative when asked about core metrics."

– 13% of respondents do not make public their criteria for awarding the label!

Burning Questions• How can researchers account for ecolabel impacts beyond changes

in participant behavior?• How does ecolabel design affect producer and consumer

behaviors?• Do ecolabels complement, substitute for or undermine government

regulation?• Why do producers participate in ecolabel programs and what are

the relative strengths of their motivations?• What – if anything -- should be done about ecolabel proliferation?• Do single-issue labels cause "burden shifting"?• How can ecolabels best encourage innovation?

Ecolabels and Public Policy• If label competition reduces environmental gains,

government may have a role in regulating entry.• If label confusion is present, government may have a role

in rating the labels.• Voluntary labels may empower government policy in such

areas as purchasing, imports (e.g. Lacey Act), and minimum quality standards.

Summary• Large retailers and institutional buyers are key demand drivers, and have the

capacity to process and act upon more detailed sustainability information than consumers.

• There is no assurance that competition between ecolabels will produce socially optimal results. – In some situations government involvement may be warranted

• Empirical evidence about the impact of ecolabels  on the environmental and social performance of participants is limited. Need more work on:– What is the direct impact of ecolabels in particular industries? Why does their impact vary?– What is the indirect impact of ecolabels?– How do specific elements of an ecolabel affect its impact?

• More attention is needed to when labels replace the need for government regulation, and when they need to work together.