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Inside track – Study explores employees’ views of companies’ ESG claims

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    Many companies commit publicly to good ESG[1] practice, but do these pledges genuinely reflect how they behave, or are they greenwashing? One way to tackle the question is to ask employees. Here we report on a study taking that approach presented at the latest conference of the Global Research Alliance for Sustainable Investment and Finance (GRASFI).   

    This article is part of our series on current academic research into a range of sustainability-related investment topics. The papers discussed were presented at the latest annual Global Research Alliance for Sustainable Investment and Finance conference. We believe in science-led sustainable investment. Partnering with academic researchers can add value since thorough research helps us to grasp the scope of climate change and biodiversity loss, to quantify risk, and to develop fit-for-purpose solutions. This is why we sponsor GRASFI’s annual conference and share relevant scientific findings with investors, clients and the wider asset management industry on our websites. 

    With the upsurge of interest in sustainability-related investing, and in response to expanding regulatory requirements, more companies are declaring their commitment to ESG values and behaviour. For example, 86% of S&P 500 companies voluntarily issued a sustainability report in 2021, outlining their ESG commitments in the form of stated values and company policies and goals. Such details are generally taken into account in the ESG ratings of agencies such as MSCI and Refinitiv.

    However, while announcing these policies and values can improve a firm’s ESG rating, they may not necessarily reflect actual actions. This could mean that investors aiming to invest in what they think are sustainable companies may end up investing in firms that are not as ‘green’ as they appear.

    One way to evaluate whether ESG commitments permeate a company is to examine how its employees perceive its ESG practices. This was the nub of research reported in the paper Do Employees Have Useful Information About Firms’ ESG Practices?, presented by Hoa Briscoe-Tranat last year’s GRASFI conference.

    The author analyses 10.4 million anonymous reviews by employees of their employers – some 300 000 public and private companies – on career intelligence site to get an inside view of ESG practices. The resulting measure could be used not only to predict a firm’s future misconduct, accounting issues, shareholder activism and downside risk, but also its valuation, sales growth and likelihood of entering Fortune’s list of 100 Best Companies.

    The research shows that the inside measure of employees’ anonymous views was generally weakly correlated with companies’ disclosed ESG practices and existing ESG ratings. In three different settings in which a firm states a commitment or faces strong incentives to improve ESG policies, the firm’s employees rarely see an improvement in its ESG practices. The inside view also shows no strong link to a firm’s stated ESG policies.

    Finding the right words

    The pivotal challenge for the author was to form comprehensive dictionaries for ESG topics that are specific to employee reviews. This involved creating a seed word list for each ESG category by retaining the most frequently used words and phrases about E, S, and G issues in ESG rating methodologies and academic articles.

    The author then trained a machine learning model called word2vec to learn the meaning of all the words in the 10.4 million employee reviews. The model’s output enabled the seed word list to be extended to the 500 most similar words in each ESG category, bringing the final dictionaries closer to the vocabulary employees often use to describe ESG topics.

    For example, it added many meaningful ESG words, such as biofuel and fertilizer to environmental topics, advocacy and social justice to social topics, and malfeasance and embezzlement to governance topics.

    Employee reviews are likely informative about a firm’s ESG practices because the dictionaries indicate that employees pay extensive attention to ESG topics. On average, 43% of reviews mention at least one ESG word in the research sample of 1 936 publicly listed companies.

    Moreover, the employees’ attention to ESG topics, as measured by the percentage of ESG words in a review, remained stable between 2008 and 2021, suggesting that the employees have long cared about ESG issues.  And their attention spikes around major ESG events: 

    • On environmental issues, it spiked in 2015 when world governments signed the Paris Agreement to limit global warming
    • On social issues, it spiked in 2020 when the Covid crisis raised health and safety concerns in the US, and again when the death of George Floyd triggered social unrest
    • On governance, it spiked when companies’ governance was tested during the 2008 Global Financial Crisis and the 2020 Covid pandemic. 

    A reliable view

    The employee view measure appears reliable in many respects. For example, the distribution of the inside view on each ESG category was bell-shaped: less than 0.2% of all reviews exhibited an all-positive or all-negative view across the ESG categories, indicating that the reviews suffer little from the halo effect – the tendency for a reviewer’s judgement of one category to influence their judgement of another category.

    The research included a study of whether stated ESG policies permeate the company and thus influence its internal ESG practices, in which case a firm with better ESG policies should have a better inside view. However, this might not be the case if the firm establishes its ESG policies largely to greenwash its public image.

    Using the number of ESG-related strengths from the MSCI ESG database to capture a firm’s ESG policies, the author found evidence consistent with the latter idea. The association between a firm’s ESG policies and its future inside view was only statistically significant for the social ‘S’ category, and it was close to zero for all the ESG categories.

    Implications for industry practices

    The paper shows that a firm’s stated ESG policies are often inconsistent with how its employees view its ESG practices.

    For example, when a company states a broad commitment to ESG practices by signing the Business Roundtable’s stakeholder-oriented statement of purpose, its employees do not view its ESG practices as improving subsequently. However, when the commitment to ESG practices carries a high compliance and reputational cost – as in the case of signing up to the UN Global Compact – there is a significant subsequent improvement in the inside view.

    The author believes the findings imply that ESG policies rarely permeate the company unless the company sees likely benefits of following through with the policies – or likely costs of not doing so.

    This paper could have significant implications for industry practices. The method of capturing employees’ views could help the ESG rating industry refine how it measures corporate ESG practices. If that were to throw a clearer and sharper light on whether a company is greenwashing, it could be helpful for investors seeking to make that judgment call.

    “Understanding a company’s impact on a diverse group of stakeholders is an important aspect of social risk analysis. However, what stakeholders think of company practices is rarely considered. The author’s use of novel employee sentiment data may help with evaluating the authenticity of corporate claims and points to an area ripe for further research.”   

    Alex Bernhardt, Global Head of Sustainability Research at BNP Paribas Asset Management.

    [1] Using environmental, social and governance criteria 


    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
    Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.

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