E Book Digital Disruptionand Environmental Social Governance
E Book Digital Disruptionand Environmental Social Governance
Lian Liu
Asian Development Bank Institute
Naoko Nemoto
Waseda Business School
This study hypothesized that firms’ Environmental, Social and Governance (ESG) evaluation is related
positively to their attractiveness to prospective employees. Although growing number of researches have
been focusing on relations between ESG evaluation and corporate financial performance, few researches
have investigated the link between ESG evaluation and corporate attractiveness as employers. Results
indicate ESG evaluation is related to firms’ attractiveness as employers, suggesting that a firm’s high ESG
scores may provide a competitive advantage in attracting human talents and enhancing corporate value.
At a time when corporate success depends on a high-level staff, the need for corporate to improve ESG
evaluation is intensifying. Regarding the impact of ESG component, the study shows Environmental factor
has significant positive impact on attractiveness of larger firms, while Governance is most relevant for
smaller firms.
INTRODUCTION
This study tests the hypothesis that corporate with high Environmental, Social and Governance (ESG)
evaluation have competitive advantages in attracting a larger pool of candidates and improving corporate
value.
Recently, an increasing number of investors have incorporated non-financial factors measured by
environmental, social, and governance (ESG) issues into their investment decision making (World Bank,
2018). ESG investment has expanded and reached $30.68 trillion in the five major markets in 2018,
increasing from $ 18.23 trillion in 2014 (Global Sustainable Investment Alliance, 2018). Since COVID-19
shock in early 2020, the inflow of funds into ESG investment has further accelerated (IIF, 2020)1. Reasons
for the increase in investment balance are as follows (Yuyama, 2020): 1) implementation of Principal of
Responsible Investment2 under the leadership of the United Nations, which has been supported by more
than 3,000 investors, 2) the adoption of the Sustainable Development Goals by 193 member countries of
United Nations in 2015 and subsequent policy responses, 3) increased awareness of climate change risks in
the wake of the Paris Agreement (2015) and other factors, and 4) increased interest in unemployment,
economic inequality, and sustainable growth of companies due to pandemic risks. When factoring into ESG
investments, investors often refer to the scoring of ESG evaluation companies and regard their assessment
Mechanism and Channels to Link Between ESG Evaluation and Financial Performance
The transmission channels that link ESG evaluation with corporate financial performance remain to be
debated. Prior literature explained the linkage based on the stake holder’s theory. Jensen (2001) indicates
companies with high ESG evaluation have advantage in strategic management of various stakeholders,
Research Hypothesis
Based on the prior reference, this paper derives following hypotheses to detect the link between ESG
evaluation, corporates attractiveness as employers and corporate value:
H1: A positive relationship exists between ESG evaluation and corporates attractiveness as employers.
This hypothesis is supported by the existing theories, namely signaling theory (Fisman et. Al 2006) and
social identity theory (Dutton et.al 1994). This result is consistent with the results of existing survey.
According to Deloitte’s millennial survey, the millennium generation place priority to ESG factors as the
purpose of business. For instance, 32% of respondents believe the business should achieve improvement of
society, while 27% say the business should achieve generating profits. The survey also shows those who
perceive their workplace is engaged in environmental protection and other ESG issues tend to have high
motivation and loyalty to the company (Deloitte, P., 2019).
H2: A positive relationship exists between corporate attractiveness as employers and corporate value.
Attracting and retaining superior human resources can provide organization with a sustained
competitive advantage and sustainable growth (Hiller and Kroll, 1995). With the current labor shortage in
some sectors and the projected shortage amid aging society, attracting top-quality young applicants is
becoming increasingly important for organizational success in Japan and other countries. This study verifies
this hypothesis by estimating the effects of corporate attractiveness on Tobin’s Q which is a proxy of
corporate value.
Data
Dependent Variable: Attractiveness for Employers (Employment Brand Ranking)
The data in this analysis span from 2016-2019 on a yearly basis. To test the hypothesis 1 and measure
corporate attractiveness as employers, this study uses the employment brand ranking, created by the Bunka
Broadcasting Career Partners Employment Information Research Institute, one of the most famous
employment information companies in Japan. This institute has conducted "employment brand survey"
during October and March and published the results in April and August since 2001. More than 20,000
university and graduate students who are registered on the employment information site responded. The
employment ranking is made based on the result of the poll. The top 300 companies are regularly announced
by its official site8 and Toyo Keizai magazines which are widely read among businesspersons. We used the
survey results published in latter half of the year, as students vote after attending the firm briefings or
interviews and it could be a more accurate assessment. In this research, the employment brand ranking is
split into a 7-point scale, with 1 meaning that the companies are ranked 1 to 50, while 7 meaning that the
companies are ranked beyond 300.
where, 𝐶𝐶𝐶𝐶𝐶𝐶 represents market capitalization of the company, while 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 represents total assets.
Control Variable
Drawing on the literature that examines the drivers of corporate attractiveness and corporate brand, the
control variables are corporate size (market capitalization), return on assets (ROA), revenue growth, price-
to-earnings ratio (P/E) and industry classification. We use the natural logarithm of market capitalization (in
millions of Japanese yen) as a proxy for firm size. Larger firms tend to be more visible to the publics and
Methodology
Using the data sets explained in Section 3.1, a twofold approach is implemented. First, we developed
the following panel data regression model to estimate corporate attractiveness (corporate employment brand
ranking):
𝑅𝑅 𝑅𝑅𝑅𝑅 𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 = 𝛼𝛼0 + 𝛼𝛼1 𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖 + 𝛼𝛼2 𝑋𝑋𝑖𝑖𝑖𝑖 + 𝛼𝛼3 𝛾𝛾 + 𝜇𝜇𝑖𝑖𝑖𝑖 (2)
𝑅𝑅
𝑅𝑅
𝑡𝑡
𝑡𝑡
where, i and t denote the firms and time indices, respectively. The residuals are 𝜖𝜖𝑖𝑖𝑖𝑖 = 𝛾𝛾 + 𝜇𝜇𝑖𝑖𝑖𝑖 , where 𝛾𝛾
represents the unobserved time specific effect, while 𝜇𝜇𝑖𝑖𝑖𝑖 represents the random error term. 𝛼𝛼0 represents
𝑡𝑡
𝑡𝑡
constant terms. 𝑅𝑅 𝑅𝑅𝑅𝑅 𝑅𝑅𝑅𝑅 𝑖𝑖𝑖𝑖 denotes employment brand ranking, as a reflection of corporate attractiveness
𝑅𝑅
𝑅𝑅
for employer. 𝐶𝐶 𝑖𝑖𝑖𝑖 denotes corporate CSR ranking. The variable is lagged by 4 months to mitigate against
𝐶𝐶𝐶𝐶
endogeneity concerns. To examine the impact of different aspects of ESG (Environment, human resource
utilization, social contribution, and corporate governance) on corporate attractiveness, we estimate separate
models by replacing 𝐶𝐶 𝑖𝑖𝑖𝑖 with 𝐸𝐸𝑖𝑖𝑖𝑖 , 1𝑖𝑖𝑖𝑖 , 2𝑖𝑖𝑖𝑖 , 𝑖𝑖𝑖𝑖 , respectively. Here, 𝐸𝐸𝑖𝑖𝑖𝑖 denotes environment. 1𝑖𝑖𝑖𝑖
𝐶𝐶𝐶𝐶
𝑆𝑆
𝑆𝑆
𝐺𝐺
𝑆𝑆
denotes human resource utilization. 2𝑖𝑖𝑖𝑖 denotes social contribution. 𝑖𝑖𝑖𝑖 stands for corporate governance.
𝑆𝑆
𝐺𝐺
𝑋𝑋𝑖𝑖𝑖𝑖 is a vector of control variables for equation (2). Our primary control variables in our model are
market capitalization, return on assets (ROA), revenue growth, price-to-earnings ratio (P/E), and industry
dummy.
Second, we developed the following regression model to explore the link between corporate value and
corporates’ attractiveness as employers.
𝑄𝑄 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑖𝑖𝑖𝑖 = 𝛼𝛼0 + 𝛼𝛼1 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 + 𝛼𝛼2 𝑌𝑌𝑖𝑖𝑖𝑖 + 𝛼𝛼3 𝛾𝛾𝑡𝑡 + 𝜇𝜇𝑖𝑖𝑖𝑖 (3)
𝑄𝑄 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑖𝑖𝑖𝑖 denotes Tobin’s Q ratio. 𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖𝑖𝑖 denotes corporate CSR ranking. 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 represents
employment brand ranking, as a reflection of corporates’ attractiveness for employer. 𝑌𝑌𝑖𝑖𝑖𝑖 is an array of
control variables for equation (3), which comprise total asset, financial leverage measured by corporate
debt as a percentage of equity, ROA, revenue growth rate and industry dummy?
First, company size is widely recognized as an essential factor affecting corporate financial
performance because larger firms have greater bargaining power over suppliers and buyers, and thus could
positively affect corporate value (Waddock and Graves, 1997; Cho and Tsang, 2020). Second, financial
leverage is one of tools a company can use to make the best financing and investment decisions. Stable and
optimal capital structure contributes to better financial performance. Therefore, we include it as the control
variable. Third, sales growth rate represents growth potential of firm. Finally, ROA is included in the
regression model to control the effect of firms’ current profitability.
TABLE 1
DESCRIPTIVE STATISTICS
Table 2 displays Pearson correlations between the main variables. As expected, ESG evaluation scores
provide initial evidence on the negative implication of ESG on corporate attractiveness as employers. Based
on the Pearson correlation coefficients matrix, most of the correlation are less than 0.5 which offers
evidence that our estimate will not suffer from multicollinearity. However, each component of ESG and
ESG aggregate score show higher correlation.
1 2 3 4 5 6 7 8 9 10 11 12 13
1 Q ratio 1
2 Ranking 0.086 1
3 ROA 0.769 0.203 1
4 P/E 0.302 -0.004 0.019 1
5 Growth 0.009 -0.077 0.112 -0.123 1
6 Ln(asset) -0.445 -0.366 -0.464 -0.177 0.112 1
7 ln(cap) 0.186 -0.311 0.113 -0.018 0.156 0.696 1
8 Debt -0.363 -0.132 -0.443 -0.073 0.040 0.451 0.014 1
9 ESG -0.014 -0.250 -0.042 0.027 0.053 0.190 0.209 0.051 1
10 E -0.168 -0.187 -0.096 -0.107 0.041 0.313 0.323 -0.007 0.423 1
11 S1 -0.057 -0.190 -0.056 -0.006 0.048 0.165 0.175 0.028 0.815 0.605 1
12 S2 -0.115 -0.217 -0.069 -0.061 0.044 0.329 0.386 -0.039 0.527 0.757 0.675 1
13 G -0.114 -0.063 -0.027 -0.049 -0.025 -0.012 0.000 -0.066 0.473 0.551 0.640 0.666 1
Note: All the variables use the same abbreviations throughout the paper.
Empirical Results
The results from the estimation of equation (2) are provided in Table 3. The overall evaluation of ESG
has significant negative signs, which suggests that higher ESG evaluation is associated with higher student
brand ranking, namely higher attractiveness as employers.
To assess the effect of each ESG component, we replace the overall ESG scores with E(environment),
S1(human resource utilization), S2(social contribution), and G (corporate governance). All components
have significant negative signs, suggesting each component is associated with attractiveness as employers.
It shows corporate with high Environmental, Social and Governance (ESG) evaluation have competitive
advantages in attracting a larger pool of candidates. The result is striking in two ways. First, ESG evaluation
seem to have more significant impact on organizational attractiveness than other financial indicators
including revenue growth and P/E ratio. Second, coefficient of E (environment) is significant with higher
confidence level, compared to that of S1(human resource utilization). This is contrary to expectations that
work-life balance, wages and leave systems are more essential factors in choosing the workplace. Our
findings suggest potential applicants place emphasis on evaluation of corporate commitment to
environmental protection, conserving and managing resources, good relations with society and fair and
transparent management when choosing the firm.
The coefficients of the control variables accord largely with prior studies and are also in alignment with
the findings in the related literature. To conserve space, the table does not include the coefficients associated
with the time dummies and industry dummies.
Results of Subgroups
We applied the model to subgroups which are divided based on the market capitalization. The
coefficient significance of each component is different depending on the group. For the group of larger
firms, environment has significant impact on corporate attractiveness as employer, while for the group of
smaller firms, governance is significant. The prior literature indicates the corporate governance is the most
critical factor affecting corporate value in Japan (Kato, 2000). Companies with weak corporate governance
tend to cause serious scandals and misconducts which lead to a significant decline in corporate value (GPIF,
2018). Smaller companies have relatively insufficient resources and internal architecture to develop
corporate governance, and prospective employee is expected to value governance assessments that mostly
affect corporate value. On the other hand, for larger companies, it is interpreted environmental factor is
more important under the assumption that the governance system is in place to some extent.
TABLE 4
FIXED-EFFECT REGRESSION RESULTS ON ATTRACTIVENESS FOR EMPLOYEES
TABLE 5
FIXED-EFFECT REGRESSION RESULTS ON ATTRACTIVENESS FOR EMPLOYEES
(LARGER GROUP)
The result from equation (3) is provided in Table 7. It shows a significant negative relationship between
Tobin’s Q ratio and employment ranking, implying that attracting and retaining superior human resources
can provide organization with a sustained competitive advantage and improve corporate value.
TABLE 7
OLS REGRESSION RESULTS ON CORPORATE VALUE
Tobin's Q ratio
ROA 0.153***
(0.00646)
Lnasset -0.125***
(0.0200)
Debt -0.0167
(0.0297)
Growth 0.00116
(0.00213)
Ranking -0.0257**
(0.0121)
Robustness Check
This study chooses the linear probability model following prior studies. This method is convenient and
easier to interpret (Angrist and Pischeke, 2008). On the other hand, there is argument that the ordered probit
model would be more appropriate if the number of dependent variables is limited. To confirm validity of
the estimated results, we applied the ordered probit model. From the results reported in Table 8, we confirm
the relationships between ESG evaluations and corporate attractiveness are similar with the results using
OLS.
TABLE 8
ORDERED PROBIT MODEL REGRESSION RESULTS
CONCLUSION
This study addresses the scarcity of research that examines linkage between ESG evaluation and
corporate value with the focus on corporates’ attractiveness for employers. The empirical results show ESG
evaluation is related to firms’ attractiveness as employers, suggesting that a firm’s high ESG scores may
ENDNOTES
1.
The net increase of funds which have incorporated ESG factors reached $1.3 trillion during January to
November 2020, increased by 1.5 times from the level in 2019.
2.
The PRI was launched in 2006 to encourage investors to incorporate ESG issues into investment practices
through six principles.
3.
MSCI Inc., is an American finance company headquartered in New York City and serving as a global
provider of equity, fixed income, hedge fund stock market indexes, multi-asset portfolio analysis tools and
ESG related products.
4.
FTSE Russell is the trading name of London Stock Exchange Group subsidiaries FTSE International Ltd.
The division provides equity index, as well as other indices and ESG products.
5.
Sustainalytics is a subsidiary of Morning Star that rates the sustainability of listed companies based on their
environmental, social and corporate governance performance.
6.
The Government Pension Investment Fund (GPIF), the largest asset owner in the world, signed PRI in 2015
and adapted Japan’s Stewardship Code which encourage investors to integrate ESG factors acted as a catalyst
for penetration of ESG investment in Japan.
7.
As of May 2019, only 0.13% of private corporate pension funds have adapted Japan’s Stewardship Code.
8.
Employment brand ranking is accessible from this site https://www.careerpartners.co.jp/laboratory/employ/
9.
The first dimension, environmental performance, covers the performance on environmental organization and
information disclosure, environmental performance. The second dimension, human source utilization, covers
the performance on utilization of diverse human resources, human rights, labor issues, employment of
persons with disabilities, personnel and evaluation system, work-life balance, and wages and leave system.
The third dimension, social contribution, covers the performance on social contribution business department,
social contribution activity spending, community participation activities, educational/academic support
activities, culture/arts/sports support activities, international exchange participation activities, great east
Japan earthquake and other reconstruction support. Finally, the fourth dimension, corporate governance,
covers the performance on corporate governance, legal compliance, internal control. Evaluations are carried
out on a company-wide, all-industry uniform basis.
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