August 8, 2023
Rochester Cahan, U.S. Portfolio Strategist, discusses how green hiring provides insights into firms’ authentic sustainability efforts.
Companies' self-declared ESG commitments can be misleading, and greenwashing remains a significant issue for investors. The share of ESG-related job ads can provide more concrete data to separate real ESG progress from empty promises.
Empirical Research Partners used Jobs Analytics from RavenPack to quantify firms’ ESG true efforts. Their study,
“Green Hiring: A Tangible Measure of ESG Commitment”
, also identifies a potential correlation between ESG-related hiring and stock performance in certain sectors
, US Strategist at Empirical Research Partners, about the methodological approach and the key findings of their analysis.
Empirical Research Partners
We wanted to use ESG jobs as a proxy for firms putting their money where their mouths are.
We started out by brainstorming a big list of ESG-related words and phrases (e.g., “sustainable”, “environment”, “diversity”, etc.) and then ran a first pass where we went back through the archive of job ads and pulled all the ads that had those words or phrases. Then, we hand-checked random, stratified samples where we read through the ads from various sectors, time periods, states of the economy. That allowed us to fine-tune the search list. For example, “diversity” was too general because almost every ad has generic language about being an equal opportunity employer, so that was returning too many ads. We iterated through that process a number of times until we were happy that the search list was capturing real ESG-related job ads.
The ultimate goal was to use the share of ESG job ads (i.e., the number of ESG-related roles a firm advertises for divided by the total number of roles they advertised for) as a measure of ESG penetration that goes beyond greenwashing. Hiring has a higher hurdle than simply saying the right thing, because it costs money. We wanted to use ESG jobs as a proxy for firms putting their money where their mouths are.
It’s still early days in ESG but we did find some suggestive evidence that firms from extractive industries (e.g., energy, materials) that have a higher ESG share of job ads have outperformed. One plausible reason for that is that ESG-focused investors have realized that it’s somewhat naïve to simply ignore the extractive industries; the reality is we’ll still need fossil fuels for a long time as a bridge to (hopefully) a pure-renewables energy sector. So looking for the companies that are making substantive progress in these sectors makes sense. We see sustainability-focused hiring as a leading indicator of a firm pivoting towards a more environmentally (or socially) sustainable profile. If you don’t have the talent it’s hard to do much other than talk.
I think it challenges the somewhat lazy notion that we can just ignore these companies. If we want to make real progress in addressing the enormous challenge of climate change it makes sense to be rigorously focused on the low-hanging fruit, which usually means improving the dirtiest processes first. Some of the firms that are routinely excluded from ESG portfolios are in fact making real, substantive progress in hiring legitimate ESG-focused expertise. That will translate down the road into real progress.
Adding to what I said above, I think First Generation ESG investing was a bit naïve in that it simply ignored sectors that were inconvenient from an ESG perspective. Next Generation ESG investing requires a lot more nuance. That’s even more true now because of the political climate, which makes it untenable to exclude entire sectors of the economy from investment dollars.
I’d like to ultimately establish if there’s a link between ESG hiring and another metric that we track: green patents. For example, does lots of hiring of, say, solar engineers lead to more patents in those technologies down the road. Are there certain types of ESG jobs that are leading indicators of better ESG outcomes – and better stock price performance – down the road?
For the full paper,
Empirical Research Partners.
is the U.S. Portfolio Strategist at Empirical Research Partners LLC, having joined the firm in 2013 to focus on a broad spectrum of research topics ranging from bottom-up stock-selection to top-down macroeconomic analysis. Prior to joining the firm, Mr. Cahan was the head of U.S. Quantitative Strategy for Deutsche Bank in New York. During his tenure there the team was top-ranked for quantitative research in the Institutional Investor All-America Research Team survey for three consecutive years from 2011 through 2013. Before Deutsche Bank he also held quantitatively-focused positions at Macquarie Bank and Citigroup in both New York and Sydney, Australia from 2003 through 2010. In addition to his highly regarded practitioner research, Mr. Cahan has published a number of academic articles in top journals including The Journal of Empirical Finance, The Journal of Banking and Finance, and The Journal of Portfolio Management. Mr. Cahan received a double degree in Mathematical Physics and Finance from Massey University in New Zealand in 2003, and is also a CFA charterholder.
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