The 36th Australasian Finance and Banking Conference(December, 13th 2023, Sydney)

Employment litigations and ESG report transparency
雇用訴訟とESGレポートの透明性

Van Hoanga , ThanhNguyenb, Marco Tedeschic , LinhPhamda Montpellier Business School, Franceb Japan Securities Research Institute, Japan
cUniversityPolytechnique of Marche, Italy
dLakeForest College, IL, USAWhy a research about
employment litigations and ESG?
vThe last decade witnessed a significant shift in the way businesses
approach social responsibility.
vDomestic and international firms face pressure from shareholders,local governments, international organizations, and otherstakeholders to align their strategy with ESG issues.
vFailures to meet expected ESG performance standards negatively
influence corporate reputation and profitability.
à Firm increases to communicate their sustainability initiatives via manydifferent channels, ex: ESG reports.

vOne might expect that this increase in ESG disclosure reduces
information asymmetries and helps investors better understandthe firms’ ESG efforts.
v But do firms make an adequate and balanced reporting of theirESG performance?

Why a research about
employment litigations and ESG?
lIn the ESG field, social (S) aspect has been lessconsidered than the governance (G) andenvironmental (E) aspects though it is very
important as it is directly related to human beings.
lEmployment litigations are a clear measure of thesocial performance of a company.
l Employment litigation shows the degree of conflictual
relationship between employers and employees.
l Employment litigation can influence firm’s motivation todisclose ESG information.

Empirical works so far
ØIn ESG area, most of previous studies investigated the relation
between ESG and financial performance. Several authors analyzed
the performance of ESG investing, ESG ratings, or ESG regulations(e.g., Cornell, 2021; Avramov et al., 2022; and Singhania et al.,2021).
ØHackett et al. (2020) is the only study that investigates the direct
link between ESG risks and employment litigations. According tothe authors, ESG related litigations have increased strongly theselater years.
ØLitigation and capital structure (Unsal, 2021): Reducing short-term
debt while increasing long-term debt.
ØLitigation and reputation (Liu et al., 2016): Reducing thereputation of the CEO.
ØLitigation and stock performance (Zuo et al., 2022): Greater risk offalling stock prices.
• No available research about the effects of employment litigations on
non-financial dimensions like ESG reporting transparency

Research motivation• Few research analyze the impact of employee relations on
ESG performance and disclosure.
• This research fills the research gap by providing empiricalevidence about the correlation between employment
lawsuits at the firm level and the resulting ESG
performance and disclosure.

Research datavWe use the data sample of American firms in the S&P
500 index.
• US have been known as the country with the highest
number of litigations.
• Employee lawsuits in the US have risen 400% in the past 20years (Rayfield and Unsal, 2020).
• 25% of all litigations in the federal court system are related
to employment allegations (Unsal et al. ,2017). Annual
direct litigation cost of Fortune 500 companies are huge.

Research datavWe collect data for the companies of the S&P 500 index
from 2013 to 2021, using Bloomberg terminal, including
No. of litigations that a company has in 74 litigation
categories.
vThe result novelty is its database. We must enter thedata by hand because we cannot download the historical
data for this function, and the categories of disputes are
not the same for companies
vAmong the 74 categories of litigations à the mostfrequent categories of litigations: employment andpatents.

Research datavWe used the Bloomberg ESG disclosure score togauge the transparency of firms’ ESG reports.
vThe score ranges from 0 to 100, with 100
representing maximum transparency.

Research datavWe also collected ESG scores of MSCI of S&P 500
firms during the 2013-2021 period.
vBloomberg ESG score reflects ESG reportingtransparency while MSCI ESG score measure a firm’s
ESG risk management capacity.
vConcretely, MSCI ESG scores measure how well afirm is managing ESG risks.
• The higher is the score, the better the company ismanaging ESG risks and opportunities.

Theory framework• Stakeholder theory
ü Employees are major corporate stakeholders à building good employee
relations can contribute to the firm value and vice versa.
ü The company needs to respond to requests from its stakeholders, such as
employees and investors, including requests for information.
ü Firms with poor employee relations will report less on social aspects, resulting alower social disclosure score• Information asymmetry theory
ü Company management have more information than employees and investors,including information on litigation.
àFirms with good employee relations should have few labor lawsuits, releasing
more information about their ESG activities.
àFirms facing an increase in employment litigations often disclose lesssocial performance information, and compensating by releasing moregovernance or environmental information.

Research hypotheses
vHypothesis 1: Employment litigations and ESG disclosure
H1a. A higher number of employment litigations is associated with a lower
social disclosure score.
H1b. A higher number of employment litigations is associated with a higher
governance disclosure score.
H1c. A higher number of employment litigations is associated with a higher
environmental disclosure score.
vHypothesis 2: Employment litigations and ESG performance
H2a. A higher number of employment litigations is associated with a lower
MSCI social score
H2b. A higher number of employment litigations is associated with a higher
MSCI governance score.
H2c. A higher number of employment litigations is associated with a higher
MSCI environmental score.

Methodology frameworkuBaseline regression:uEmpirical results are obtained via panel data regressions,either fixed or random effects; reverse causality
regression and several sensitivity analyses.

Results 1: Baseline modelResults 2: Reverse causality
regression

Robustness check 1: Size-adjusted
number of employment litigations

Robustness check 1: Lagged-1 valuesof the number of employment
litigations

Robustness check 2: with CSR variables

Robustness check 2: with governancevariablesRobustness check 3: Sub-samples
Light vs. Heavy Industries§ Light industries include Consumer Discretionary, Consumer Staples,Healthcare, Financials, Information Technology, Communication
Services, and Real Estates.
§ Heavy industries include the Energy, Materials, Industrials, and Utilities
sectors.

Robustness check 3: Sub-samples

Conclusion (1)1. Empirical results show that employment
litigations have a negative effect on both thesocial disclosure and social risk managementscores.
2. Effect of employment litigations on theenvironmental and governance pillars is positive.

Conclusion (2)3. Corporate leverage, governance, CSR engagement,and institutional ownership, moderate therelationship between employment litigations andESG scores.
4. Heavy-industry firms have a different behavior
compared to those in light industries.

Research implication (1)1. Employee relations play a significant role indetermining firm-level ESG performance, which
implies the role of employees as one of the mostimportant stakeholders in corporate governance.
2. The results of this study emphasize the necessity ofgiving more attention to the social aspect of ESG, asector often overlooked compared to environmental
and governance factors.

Research implication (2)3. This research promotes the creation of a social
taxonomy to complement the existing
environmental taxonomy. A social taxonomy would
assist financial entities in directing capital towardfirms meeting social standards and producing
beneficial social impacts for employees and otherstakeholders.
4. It also indicates the need for including additionalsocial metrics, such as the number of employment
litigations, in the ESG landscape.

Thank you for your attentions!