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Study of Glassdoor Reviews Finds Strong Evidence of Widespread Greenwashing

Hoa Briscoe-TranThis study uses artificial intelligence to scan Glassdoor reviews for key words to identify employee views about their companies’ environmental, social, and governance (ESG) practices. The results suggest that unless ESG claims are backed up with tangible action, most employees are skeptical. Moreover, it suggests that the Business Roundtable 2019 change of the charter of organizations to focus on the needs of all stakeholders did not ring true with the employees at the signatory companies. 

Big Incentives to Greenwashing With Low Costs
Business Roundtable Company Employees Skeptical of Claims
Do Employees Have Useful Information About Firms’ ESG Practices?” The answer at least to this Ph.d candidate in finance is an emphatic yes, based on an analysis of key words used by employees in comments about their companies’ environmental, social, and governance practices.
The study by Hoa Briscoe-Tran in the Department of Finance at Ohio State University (OSU), finds that employees have useful insight to help assess a firms’ environmental, social, and governance (ESG) practices. Based on “10.4 million anonymous employee reviews via a word-embedding model to construct an inside view of corporate ESG practices,” this “inside view has useful information beyond external ratings in predicting a firm’s future misconduct, governance issues, downside risk, growth, and valuation. In addition, the inside view appears robust to greenwashing, both theoretically and empirically.” The study finds that employees are likely best qualified to assess the sincerity of organizational claims and do not change their company’s view of ESG policies unless there is a shock that results in a significant increase in investment in some aspect of ESG.

The conclusions underline why the European Union Corporate Sustainabilty Reporting Directive will require audited reports.

Big Incentives to Greenwashing With Low Costs

The professor writes, “Companies have an incentive to appear ESG-friendly given the recent trend in sustainable investing. Globally, 36% of all professionally managed assets was invested according to some ESG criteria in 2020. The sustainable investing industry has become so large that, globally, over 600 agencies were rating firms on ESG issues, creating an even more direct incentive for firms to appear more ESG-friendly. Given such an incentive, existing ESG ratings likely suffer from a greenwashing bias, especially when most ESG ratings rely on data sources that firms can influence, such as corporate ESG reports, annual reports, and news...For example, a firm can inflate ratings by highlighting immaterial ESG practices, such as charity donations, while ignoring material but costlier ESG practices, such as diversity and inclusion practices. Worse yet, ESG rating agencies often involve the rated firm in the rating process, further enabling the firm to influence its ratings. For instance, Dow Jones Sustainability Index provides companies with ‘feedback to help them improve and enhance their score and performance.’”
Through the analysis, the professor finds that “the corporate greenwashing bias, however, is less likely to affect employees’ inside view of ESG practices. A firm’s employees have little incentive to greenwash its ESG image, especially under anonymity. Anonymous employees could share sensitive information, such as harassment or frauds without fear of retaliation.”
Moreover, the study finds the inside view appears to support the prevalence of corporate greenwashing “as low-cost changes in a firm’s ESG policies do not affect the inside view while more expensive changes do, across multiple settings, including a novel exogenous shock,” i.e., caused by an unexpected external phenomenon. “Thus, perhaps unsurprisingly, the inside view has a low correlation with a firm’s stated ESG policies and ratings, implying that corporate greenwashing may be pervasive.”

Business Roundtable Company Employees Skeptical of Claims

The professor’s analysis does not speak kindly of the Business Roundtable’s (BRT) 2019 announcement to redefine the charter of corporations to address the needs of all stakeholders. “As expected, the inside view indicates that the BRT commitment is less credible than the UN Global Compact Commitment. Signing the BRT statement is not significantly associated with a larger improvement in the inside view of ESG practices. Moreover, before signing the BRT statement, BRT firms do not have a significantly better inside view.
A likely reason for the low correlation between a firm’s stated ESG policies and its inside view is that the firm often faces little cost in instituting ESG policies, i.e., there is a low cost of greenwashing. The analysis finds more value to being associated with the UN Global Compact (UNGC), the world’s largest corporate sustainability initiative. “Unlike the BRT commitment, the UNGC commitment carries a likely large compliance and reputational cost because it requires that firms report annual progress or else get publicly expelled. Historically, the UNGC has expelled over 40% of its participants between 2000 and 2020. As expected, the inside view indicates that the BRT commitment is less credible than the UNGC commitment. Signing the BRT statement is not significantly associated with a larger improvement in the inside view of ESG practices.”
The study underlines that employee views are better predictors of actual business practices than rating companies. “Firms appear to walk the ESG talk only when failing to do so is costly,” the professor writes. “Overall, the high cost of an ESG commitment appears to make it more likely for a firm to follow through with the commitment.”

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