More companies than ever are now proudly announcing they’re carbon neutral or net zero. Yet July 2023 marked the hottest month in the world’s history. This disconnect between corporate claims and climate reality raises the unavoidable question: Are many corporate sustainability claims simply greenwashing?
For years, various types of environmental, social, and governance (ESG) ratings have been used to evaluate companies’ environmental efforts. But these traditional ratings are known to result from subjectivity and are prone to corporate greenwashing, the practice of making unsubstantiated environmental claims, or even more recently, greenhushing, the practice of downplaying environmental claims for fear of being accused of greenwashing.
We conducted a study that recognized the limitations of traditional ESG ratings and introduced a novel measure, Green Score, to provide a more action-based, objective barometer to measure companies’ environmental efforts. Green Score is a metric that leverages companies’ demand for green skills in job advertisements to provide a more credible evaluation of companies’ environmental efforts.
What Is Green Score?
Green Score captures an organization’s investment in green human capital, which is a set of employees’ knowledge, skills, and abilities related to environmental protection and green innovation. It’s computed based on the concentration of green skills—environmental-related skills (e.g., environmental science, hazardous waste handling, and water treatment skills)—required in companies’ job advertisements. Using job advertisements to compute Green Score offers a dynamic way to capture companies’ evolving investment in green human capital.
Organizations need people with green skills to execute environmental and sustainability initiatives. For each job advertisement, the Green Score per job is simply the percentage of the required skills classified as green skills. Averaging the Green Score of all of a company’s green job advertisements results in the organization’s overall Green Score. Green Score focuses on job skills rather than job titles because the former offer a more accurate evaluation of a company’s true commitment to improving its environmental performance.
Green Score and Profitability
Our study examined whether Green Score predicts organizations’ future profitability, and analyses showed a clear connection between the two. The economic impact is also substantial: A one standard deviation increase in a company’s Green Score is associated with a 3.8% rise in its median return on assets.
By using DuPont analyses, which breaks down a company’s profitability into its constituent parts, allowing for a more comprehensive understanding of its financial performance, the study found that the improvement in profitability primarily comes from an increase in revenue and net profit margin among companies that invest more in green human capital. The increased investment helps organizations to develop more environmental-related products and services or even high-quality, well-cited green patents that eventually boost companies’ competitiveness. These companies are better at meeting customer demands for sustainability and earn higher premiums for their products and services.
Traditional ESG ratings, unfortunately, don’t necessarily predict future profitability like Green Score does. Only green new hiring through Green Score sufficiently captures companies’ genuine environmental efforts that pay off in terms of product differentiation, innovation, and, ultimately, profitability.
Green Score vs. ESG Ratings
Traditional ESG ratings typically rely on claims made by companies in their annual reports, press releases, or sustainability reports. Hence, it’s no surprise that these types of voluntary disclosures are prone to greenwashing because companies can overclaim their environmental assertions through selective reporting. Green Score by design is less likely to be affected by these hurdles because what organizations do is more informative than what they say.
Green Score is computed based on an organization’s numerous job advertisements across different job positions and functions. Because it’s very difficult for companies to manipulate job advertisements, the measure provides an almost real-time, forward-looking indicator of corporate investment in green human capital. Unlike traditional ESG ratings that scrutinize past initiatives, Green Score signals whether companies are building environmental sustainability through strategic new hiring.
Green Score is a more transparent and dynamic metric than a traditional ESG rating, which is more susceptible to corporate greenwashing. Green Score is based on green human capital investment that traditional ESG ratings typically overlook.
Practical Implications
Our study found that companies tend to be passive in their green human capital investment, and negative environmental incidents are the usual trigger for companies to improve their Green Score. This fact opens up several potential practical applications for practitioners. The standardized nature of Green Score allows companies in different industries to directly compare and benchmark their investment in green human capital. The gap between Green Score and traditional ESG ratings also reveals which companies are greenwashing instead of genuinely investing in environmental efforts.
Corporate managers should focus on creating green jobs with a higher concentration of green skills, instead of merely creating other green jobs. The fact that Green Score focuses on green skill concentration means that it can help managers better understand if their green new hiring is pumping up head count or genuinely boosting green human capital. Considering the gap of Green Score in companies’ job positions provides valuable insights on their recruitment strategies, talent retention policies, and business strategies.
This research study introduced a novel, action-based metric that reveals a company’s investment in green human capital generally overlooked in traditional ESG ratings. Green Score affirms again the conventional wisdom in ESG research: Companies could do good and do well at the same time because their environmental efforts are strongly linked to future profitability and corporate innovation.
October 2023
