ESG Performance, Economic Policy Uncertainty, and Labor Investment Efficiency

This study investigates the relation between firms’ environmental, social, and governance (ESG) performance and their labor investment efficiency, where labor investment efficiency is measured by the extent to which labor investment deviates from the level justified by the economic fundamentals of the firms. Using a sample of 6,291 Korean firms from 2011 to 2019, we find that firms with better ESG performance invest more efficiently in human capital, especially by less under-firing and less under-hiring. The role of ESG practices in improving labor investment efficiency is more evident during periods of high economic policy uncertainty. In addition, the relation is more pronounced for firms not affiliated with business conglomerates (i.e., chaebols), for firms operating in less human capital-intensive industries, and in periods under progressive governments. Our findings are robust to the two-stage least squares (2SLS) analyses using foreign investor ownership as an instrument as well as other robustness tests. In summary, our results imply that firms prioritizing ESG factors in their decision-making processes are better able to invest efficiently in their workforce by making more timely and effective employment decisions.