How to design eco-labels to influence consumers

How can consumers choose sustainable products? Eco-labels or sustainability ratings can be an important guide. These systems compare products or services in terms of their social and environmental performance, identifying those that are best in class.

But not all rating systems are equally effective at influencing consumers. When the European Union recently revised its energy efficiency ratings for appliances, researchers Stefanie Hille (née Heinzle) and Rolf Wüstenhagen identified what kind of ratings were most likely to lead consumers to make energy-efficient choices.

Hille and Wüstenhagen are runners-up for the inaugural Research Impact on Practice Award, sponsored by NBS and the Organizations and the Natural Environment (ONE) division of the Academy of Management. Their article was published in Business Strategy and the Environment. Hille was a doctoral student and Wüstenhagen is a professor at the University of St. Gallen, Switzerland.

Designing an effective rating system

Since 1992, the European Union had rated appliance energy efficiency using an A-to-G scale, with A indicating greatest efficiency. But as manufacturers increased appliance efficiency over time, virtually no appliances received the lower rankings anymore.

To differentiate products, European Union regulators had a choice. They could keep the A-to-G scale and tighten qualifications (make the standard for an A rating higher). Or, they could include additional categories to reflect the efficiency gains. With this approach, in addition to the old rating, they would offer A+, A++, and A+++ ratings (an A-plus scale).

In experiments, Hille and Wüstenhagen found that the tightened A-to-G scale was much more effective than the A-plus scale. With the A-to-G scale, the rating had over 10 percent more influence on consumers' choices than an energy label with an "A-plus" scale. Consumers saw the difference between categories in the A-to-G scale as more meaningful than the difference between the equivalent rankings in the A-plus scale.

Information presentation matters

The key lesson is that people process information differently depending on how it is framed, the researchers explain. "The European Commission's proposal was not based on a thorough understanding of how consumers would consider the new label design in their purchase decision," said Hille. "Our study was the only one available which explicitly investigated this question."

Their research became core to the policy debate. After Hille and Wüstenhagen presented their findings at academic conferences, advocacy groups and others began citing them, and the findings gained national and international media attention.

Now, the European Union recognizes that consumer testing should inform legislation, says Hille. For example, the European Union now has a unit on behavioral economics, which uses psychology and economics to understand consumer choices. That unit seeks to test the effectiveness of policy interventions before they're put into place.

Ironically, with the energy efficiency ratings, the European Union ultimately adopted the A-plus scale. This outcome was closer to the position of industry associations, which argued that tightening qualifications for the A-to-G scale would cause confusion, than to the position of consumer and environmental organizations, which had argued against the A-plus scale.

Hille is currently studying a different kind of eco-label, for cars. The European Commission is considering introducing a Europe-wide fuel consumption label that uses an A-to-G rating similar to that used for household appliances. Discussions have centered on how to provide this comparison. Cars can be rated for fuel efficiency within class (comparing SUV to SUV) or fuel consumption on an absolute scale (in which small cars, for example, generally receive higher ratings than larger cars). Again, Hille seeks to understand how consumers respond to the ratings. So far, she has found that consumers have difficulties understanding ratings that compare cars within class (where a large car receives an A label if it is among the best cars of its size, even if its absolute fuel consumption is high.)

How to create research with impact

Hille and Wüstenhagen draw research ideas from real-life problems. "I believe it really helps as a researcher to spend some time with policymakers or in industry," said Hille. Time spent working at the European Commission and European Parliament has given her a better understanding of "what gaps might be and what problems policymakers face." The policymakers she has worked with also have realized how research can help their work.

Wüstenhagen, who worked in the venture capital industry before pursuing an academic career, encourages young researchers to think about the impact their work could have on real-world issues. "I always felt like striving for a combination of rigor and relevance is how academics ultimately create value for society," he said, "I am thankful that my university supports this approach to research and teaching, and hope that other academic institutions will increasingly follow suit."

The Research Impact on Practice Award will be given annually to recognize research that provides such actionable insights. While academics produce high-quality research, much of it remains in publications and conferences targeted at other academics. This award seeks to celebrate and share research that has the opportunity to change business.

This article originally was published by Network for Business Sustainability and is reprinted with permission