While environmental, social, and governance (ESG) initiatives undeniably shape corporate reputations and stakeholder perspectives, a crucial question arises: Does the modern workforce truly value these efforts? At one end of the spectrum, critics argue that employees might prioritize job security, remuneration, and career progression over their firm’s ESG commitments. At the other end, however, increasing evidence suggests that contemporary professionals are seeking deeper alignments with their workplaces, driven by shared ethical and sustainable visions.[1]

To start our investigation, we delved into the intricate relationship between ESG reputation and employee attrition in the U.S. corporate sector. The goal was to  determine whether an organization’s public ESG standing had a significant influence on its employee retention.

Our research harnessed a dataset spanning over a decade, exploring the relationship between employee turnover and corporate ESG reputations as reflected in the sentiment of news stories. Encompassing over 160,000 firm-month observations from nearly 2,000 firms, the dataset provided a robust empirical framework for our analysis.

The dataset draws from two pivotal sources. First, Revelio Labs, which offered detailed employee metrics essential to our study. Revelio Labs leverages machine learning to extract and synthesize data from 380 million online profiles and resumes, ensuring a comprehensive view of employee dynamics across firms. Second, TruValue Labs, which was recently acquired by FactSet, added depth to our ESG perspective. The firm specializes in discerning ESG sentiments, utilizing AI to scan and analyze a plethora of articles from credible outlets. With advanced natural language processing techniques, TruValue Labs’ ESG sentiment scores capture a detailed sentiment trajectory throughout our study.

Incorporating these datasets enabled our research to illuminate the relationship between corporate ESG reputations and employee turnover in the U.S. corporate sector with exceptional depth and clarity. Our findings were clear: Organizations that consistently garnered positive recognition for their ESG commitments enjoyed notably lower employee attrition. This indicates a growing tendency among the modern workforce to align with corporations echoing their intrinsic values. Such an alignment fosters a deep sense of affiliation and pride, enhancing employee loyalty.

In more detailed analyses, a striking difference in gender responses to ESG efforts came to light. Both men and women exhibited an appreciation for ESG initiatives, especially those centered around human resources such as parental leave policies and diversity and inclusion efforts. However, on broader themes such as green gas emissions or human rights and community relations, female employees placed a greater emphasis on their employer’s ESG standing. An improvement in a firm’s ESG sentiment in these domains corresponded with a sharper decrease in female employee turnover than in male turnover.

Additionally, we explored the ESG reputations of firms relative to their regional counterparts. Two findings emerge. First, we find that employees, especially females, were more likely to leave firms with a subpar ESG reputation than other businesses in the same state. This is because employees might recognize a gap between their firm’s ESG reputation and  nearby competitors’ reputations, and it might be easier for employees to switch to a neighboring company with a higher ESG reputation. This analysis underscores both the relative importance employees place on ESG reputation and the intricate dynamics between ESG reputations, regional peer evaluations, and employee turnover. Second, geography introduced another interesting nuance. In regions with a predominantly Democratic voter base, male employees’ ESG perceptions aligned more closely with female viewpoints. This shows that individual ESG perspectives are not shaped solely by personal beliefs but also by the socio-political environment.

Our research underwent rigorous robustness checks to validate our findings. We compared our ESG sentiment metrics with Bloomberg’s daily sentiment scores, charting narratives from news and social media. This revealed that overall news sentiments were consistent with  our primary results. Moreover, integrating an ESG performance measure from the MSCI ESG KLD STATS database, our conclusions remained unchanged, indicating the relation between ESG sentiment and employee turnover was not  merely a result of ESG actions. To ensure our main ESG sentiment metric’s reliability, we tested alternative metrics, which all corroborated our primary findings. Furthermore, we tested various model configurations to affirm the model’s reliability, ensuring our results withstood comprehensive scrutiny.

Our study paints a comprehensive picture of the changing corporate landscape, where ESG is more than just a metric; it is a vital force shaping employee commitment and loyalty. As organizations navigate this landscape, it is important that they understand that sincere, all-encompassing ESG commitments are the foundation for sustainable success.

ENDNOTE

[1] For instance, this article mentions that according to a recent IBM study, 70 percent of employees find sustainability programs make employers more appealing (https://qz.com/workers-want-companies-that-care-about-esg-how-to-lever-1849880580).

This post comes to us from professors Ming D. Leung, Ben Lourie, Chuchu Liang, and Chenqi Zhu at the University of California, Irvine. It is based on their recent article, “Effect of Corporate Environment Social and Governance Reputation on Employee Turnover,” available here.