Environmental performance and employee welfare: Evidence from health benefit costs

• Published date: 01 September 2023
• Author: Yuqi Gu
• Date: 01 September 2023
• DOI: http://doi.org/10.1111/irfi.12412

ORIGINAL ARTICLE

Environmental performance and employee

welfare: Evidence from health benefit costs

Yuqi Gu

Atkinson Graduate School of Management,

Willamette University, Salem, Oregon, USA

Correspondence

Yuqi Gu, Atkinson Graduate School of

Management, Willamette University, 900

State St, Salem, OR 97301, USA.

Email: ygu@willamette.edu

Abstract

This article studies whether corporate environmental per-

formance affects its health benefit costs. I find a firm's envi-

ronmental performance is negatively associated with its

employee health benefit costs. Cross-sectional tests also

show the effect is stronger for companies with improving

employee health or located in a region with higher popula-

tion health risks. In addition, the correlation only exists for

chemicals released onsite as opposed to offsite release,

indicating the effect is driven by the pricing of health risks,

rather than pure ethical reasons. These results suggest that

insurance companies promote corporate policyholders'

green behavior indirectly by rationally pricing corporate

environmental efforts.

KEYWORDS

corporate environmental performance, employee welfare, health

benefits, health insurance

JEL CLASSIFICATION

G22, J28, I13, M14, J81, Q56

1|INTRODUCTION

The environmental issue has been gaining increasing attention from investors, companies, and policymakers. For

example, in 2020, net new assets in ESG funds amounted to $51.1 billion (Curtis, 2022). Among all benefits of corpo-

rate environmental effort, a rich body of literature highlights its role in attracting and retaining employees (Aiman-

Smith et al., 2001; Bauer & Aiman-Smith, 1996; Greening & Turban, 2000). However, with the exception of a few

studies,

1

it remains unclear how CEP affects employees and employee welfare. This is surprising since prior studies

Received: 5 May 2022 Revised: 23 January 2023 Accepted: 31 January 2023

DOI: 10.1111/irfi.12412

© 2023 International Review of Finance Ltd.

484 International Review of Finance. 2023;23:484–501.

wileyonlinelibrary.com/journal/irfi

show that employee welfare has a significant impact on a wide variety of economic outcomes, including investment

efficiency, corporate innovation, stock market valuation, and profitability (Cao & Rees, 2020; Chen et al., 2016;

Edmans, 2012; Ertugrul, 2013; Faleye & Trahan, 2011; Green et al., 2019; Mao & Weathers, 2019).

In this article, I investigate whether corporate environmental performance affects on one aspect of employee

welfare, namely, the cost of employer-sponsored health insurance. Employer-sponsored health insurance plays a key

role in the U.S. healthcare system, and has been described as “private social security”(Starr, 1978). In addition, it is

an important aspect of employee welfare and plays a vital role in retaining and recruiting employees (Buchmueller &

Monheit, 2009), according to a recent survey (AHIP, 2018). Employees' total compensation can be thought of as

wages and health insurance (Currie & Madrian, 1999). How a company can curb its health benefit costs is therefore

an important topic.

In particular, I propose that corporate environmental performance can curb health benefits costs, for two rea-

sons. First, employees working for a company with better environmental performance are associated with lower

health risk exposures. Two important premises undergird this argument: (1) an employer's environmental efforts are

associated with employee health; (2) an employer's environmental performance provides signals about employee

health. With regard to the first premise, financial economists have intensively documented the short-term and long-

term effects of environmental conditions on individual health in the literature (Graff Zivin & Neidell, 2013). For

example, Ransom and Pope III (1995) uses the closure and reopening of an integrated steel mill in Utah Valley as a

quasi-natural experiment and show that changes in pollution levels cause significant health issues. Similar results are

found in manufacturing industries (Chay & Greenstone, 2003), California (Currie & Neidell, 2005), and China

(Ebenstein, 2012). Workers of polluting companies are likely to have the highest exposure to such health risks since

they are at the frontline. Indeed, many companies, such as Panasonic and Coca-Cola provide additional wages,

namely hazard pay, to compensate for their exposure to pollutants (Rubenfire, 2014). Also, there are many cases in

which pollution results in serious worker injuries and death (e.g., Barstow, 2009). On the other hand, improvement

of corporate green behavior is shown to have a beneficial effect on employee physical and mental health (Zhang

et al., 2021). Employees view their working environment as an important nonmonetary reward (Deng & Gao, 2013).

Employer's environmental activities can also significantly improve employee job satisfaction (Bauer & Aiman-

Smith, 1996; Wagner, 2011). Employees perceive a good value fit when their employers are ecologically oriented or

view CEP as a source of pride, which positively affects their mental health (Page & Vella-Brodrick, 2009) and reduces

health-related risk exposure.

The second premise is supported by prior studies that emphasize the signaling effect of environmental perfor-

mance in the labor market (Huffman & Klein, 2013). Employees infer the employer's prosocial attitude (including

employee treatment) from its ecological activities. Jones et al. (2009) show that participants have a more positive

expectation for employee treatment when they read a firm's green practice than otherwise. To the extent that

employee treatment is inherently related to prosocial attitude (Folger et al., 2001), CEP can carry valuable informa-

tion about current and future employee well-being and reduce the information asymmetry problem underlying the

pricing of insurance contracts (Akerlof, 1978; Arrow, 1963,1968; Pauly, 1968; Rothschild & Stiglitz, 1978;

Zeckhauser, 1970). As a result, insurance companies rationally estimate the future costs of health insurance coverage

and price such costs of health benefits into premiums based on the information of the current and future employee

healthiness of the corporate policyholder. I call this “insurance discount”channel.

An alternative view focuses on cost optimization.

2

The traditional theory argues that environmental efforts

involve a significant amount of costs (Friedman, 2007), including regulatory compliance expenses and disclosure

requirements. Moreover, these costs are increasing significantly over time (Freeman, 1994). Therefore, a company's

environmental efforts may conflict with the interests of other stakeholders, including that of the employees. In par-

ticular, environmental-friendly companies may cut employee health benefits to support their costly environmental

efforts. As a result of this cost optimization, the lower insurance premiums might represent less rich healthcare plans

for employees. Under this view, companies make environmental efforts by sacrificing employee welfare. I call this

“cost optimization”channel.

GU 485