In this article, Professor Aaron Yoon shares with us the practical implications from his latest research paper with Professor Kyle Welsh - "Corporate Sustainability and Stock Returns: Evidence from Employee Satisfaction" 

The value relevance of environmental, social, and governance (ESG) is an increasingly important question because using ESG factors to evaluate investments in companies has in recent years become very very popular. 

Business Roundtable

In August 2019, for example, the Business Roundtable, which includes nearly 200 major-company CEOs, released a statement that a corporation’s role should go beyond creating shareholder value, to promoting sustainability and other societal benefits.

Employee Satisfaction & ESG

By 2019, the total assets under management (AUM) of United Nations Principles for Responsible Investment signatories worldwide have grown from just a few hundred-billion dollars to more than $90 trillion – almost three times the market capitalization of companies in the United States.

But research to date on how ESG relates to financial returns has been inconclusive at best, contradictory at worst. The relationship between ESG and shareholder value has never been more important, as the world pays unprecedented attention to how organizations treat people and the environment.

Indeed, how companies respond to their communities during the COVID crisis affects their ESG ratings. While doing the right thing is a powerful motivator in itself, a clearer connection between ESG and financial value would provide businesses even greater incentive to step up.

In this context, my collaborator Kyle Welch and I performed a study relating corporate ESG, employee satisfaction, and financial returns. Employee satisfaction has also been linked to positive financial impact, but has rarely been studied with ESG.

We found that while ESG by itself showed no impact on returns and employee satisfaction had small positive effect, the combination of these factors yielded the largest impact on firms’ share value and financial performance.

What We Do

In a previous study, my collaborators and I showed a link between ESG and share value when firms invest in ESG initiatives that align with their core business (i.e., sector level materiality). To build on this finding, I examine the intersection of ESG and employee satisfaction, a well-supported predictor of positive stock returns. This was because we don’t know much about the connection between ESG and satisfaction, such as whether ESG efforts instill a deeper sense of purpose in employees, boosting productivity and, ultimately, returns.

To get at that, we collected MSCI data on ESG ratings (related to 10 areas including climate change, human capital, and governance) and Glassdoor data for employee satisfaction for 8,884 firm years between 2011-2018. We then compared an investment-portfolio comprising companies with high ratings on both ESG and satisfaction to other portfolio compositions on one-year-ahead stock performance and other measures including sales and profits.

What We Find

What we found sheds much-needed light on the connections among ESG, employee satisfaction, and financial value. First, we showed that neither ESG practices nor employee satisfaction is sufficient to maximize value. In fact, we found that using ESG alone as an investment signal resulted in no meaningful improvement in returns. Using employee satisfaction alone yielded 2.4% better returns.

But the combination of ESG and employee satisfaction was the real winner. The portfolio of stocks with top ratings in both ESG practices and employee satisfaction generated 4.40 percent alpha per year, outperforming the portfolio with the lowest ratings in both categories that generated alpha of -1.21 percent by 5.61 percent per year. In essence, we found that implementing meaningful ESG and promoting employee engagement and satisfaction together improves financial returns of every type (see chart).

Practical Implications of the Findings

Our findings show that corporations need employee buy-in to make their ESG initiatives to work, and strong ESG efforts can yield more engaged, satisfied employees if people feel their employer’s values align well with their own. That satisfaction, in turn, could enhance productivity, ultimately boosting returns.

In line with this logic, it’s important to pay special attention to the “S” in ESG: social, or the people part. Indeed, most of the return effect we found was generated by firms’ social-focused investments. Companies that strive to treat employees, customers, and other stakeholders well—through focus on diversity, inclusion, equal treatment, others—are more likely to reap the rewards of their ESG initiatives.


Written by Professor Aaron YoonAssistant Professor of Accounting and Information Management at the Kellogg School of Management at Northwestern University

Full Paper Link:

Corporate Sustainability and Stock Returns: Evidence from Employee Satisfaction