Do Companies Actually Change? A Reflection on ESG Pressure and Corporate Response

In our practicum project, we worked with a technology company developing a worker voice tool that multinational firms can deploy in their supply chains. The tool aims to surface workers’ own reports of labour abuses and human rights risks and then aggregate that information into dashboards that investors and buyers can use for human rights due diligence. A couple of weeks after we began working on this project, the experience forced me and my teammates to confront an uncomfortable question: are companies embracing ESG and human rights due diligence because they genuinely care, or because regulations, investors, and buyers now require them to show that they care? It was not long before others in class asked us the same thing.

Our team tried to answer this by mapping investor and buyer pressures on firms in sectors exposed to labour rights risks and by benchmarking their public human rights policies and disclosures. For this reflection, I turned to several articles including recent Moskowitz Prize research and peer reviewed papers on human rights due diligence to help me understand whether these pressures genuinely shift corporate behaviour or simply reinforce compliance oriented ESG performance.

Active Ownership (Dimson, Karakaş and Li, 2015) studies hundreds of engagement campaigns by a large institutional investor and shows that targeted, persistent shareholder engagement can change corporate behaviour. Successful engagements, especially on material environmental and governance issues, are followed by improvements in ESG ratings, higher profitability, and positive abnormal stock returns. But the paper also finds that success is far from automatic. Campaigns work best when multiple investors coordinate, when the target company is financially healthy, and when the issue is clearly linked to firm value. In our project’s pressure mapping, this logic resonated. We saw that where ownership was fragmented and investors lacked a clear thesis for how human rights risks affect long term value, ESG demands were vague (“improve supply chain standards”) and tended to produce glossy codes of conduct rather than concrete mechanisms like worker voice channels. By contrast, in markets where regulation such as Germany’s Supply Chain Due Diligence Act or the European Union’s emerging Corporate Sustainability Due Diligence Directive has made human rights failures a legal and financial liability, investors had much sharper asks around risk management and grievance mechanisms (Federal Ministry for Economic Cooperation and Development of Germany, 2021). Active Ownership helped me interpret this: pressure matters, but only when it is specific, sustained, and credibly tied to value.

Climate Capitalists, the 2024 Moskowitz Prize winner, examines whether the rise of sustainable investing actually changes firm behaviour through the cost of capital channel (Gormsen, Huber and Oh, 2024). Using hand collected data from corporate earnings calls, the authors show that since around 2016, green firms have perceived their cost of capital to be roughly one percentage point lower than that of brown firms and that some large energy companies now apply lower discount rates to their green divisions. This suggests that when enough investors tilt toward green assets, capital becomes cheaper for firms that align with those preferences and managers adjust their investment decisions accordingly. Translating that insight back to our project, I started to see investor and buyer pressure not just as soft reputational pressure, but as something that can reshape incentives if it is visible and credible. If buyers condition long term contracts, and investors condition capital access, on the adoption of robust human rights due diligence tools such as worker voice technology, then the tool ceases to be a CSR nice to have and becomes part of the financial logic of the business. Our benchmarking work suggested that we are only part way there. Many companies reference ILO standards and the UN Guiding Principles, but far fewer link human rights performance to financing terms or commercial relationships in a way that would mirror the climate cost of capital story.

Where I became more sceptical was around the S in ESG, particularly in supply chains. O’Connor and colleagues’ report Putting the 'S' in ESG (2017) analyzes twelve leading ESG frameworks and concludes that social metrics tend to focus on what is easy to measure, such as policies and high-level commitments, rather than what is most meaningful for affected workers and communities. They also find surprisingly few indicators that meaningfully capture supply chain conditions, even though that is where many of the worst labour rights abuses occur. Similarly, Bernstein and Greenwald’s benchmarking work on labour and human rights policies in global supply chains shows that barely a quarter of large companies have explicit labour and human rights policies that extend across their value chains and that investors are only beginning to use these benchmarks to analyze long term risk (Bernstein and Greenwald, 2023). Seen through this lens, much of what we observed in our benchmarking exercise looked like exactly the problem these authors describe: beautifully worded supplier codes and human rights statements, but limited evidence of workers’ voices actually influencing decisions on the ground.

This is where our client’s worker voice tool became more than a piece of technology in my mind. The regulatory trend, including Germany’s Supply Chain Act, Norway’s Transparency Act, and the European Union’s Corporate Sustainability Due Diligence Directive, points toward an expectation that companies will identify, prevent, and remediate human rights harms not just in their own operations but deep into their supply chains. Yet O’Connor et al. (2017) show that investors currently rely on social data that often “evaluates what is most convenient, not what is most meaningful.” A worker voice platform, if designed responsibly, could begin to close that gap by generating direct, comparable data on workers’ experiences rather than relying solely on management self-reports. At the same time, the research on active ownership and Climate Capitalists reminded me that information alone is not enough. Tools only matter if powerful stakeholders use them to change incentives and engage with companies over time.

My main takeaway from this combination of project work and readings is more nuanced than where I started. I came into the class somewhat cynical that ESG and human rights due diligence were mostly about optics. After mapping investor and buyer pressures, reading Moskowitz Prize research, and wrestling with the messy reality of social metrics, I now think the answer is 'it depends.' When investor and buyer pressures are diffuse, when regulations are weak, and when data focuses on policy rather than practice, ESG can indeed become a box ticking exercise. But when regulation makes human rights risks financially material, when investors coordinate engagement around specific, measurable asks, and when tools like worker voice platforms make real conditions in supply chains visible, those same pressures can push companies beyond compliance toward genuine accountability.

The challenge and the opportunity I see for my own future work is to help shift ESG and human rights due diligence from the realm of signalling into the realm of substantive change, by aligning data, regulation, and capital so that listening to workers is not just the right thing to do, but also the rational thing to do.

Bibliography

Bernstein, A., & Greenwald, B. (2023). Assessing Human Rights and Labor Risk in Global Supply Chains: A Benchmarking Study. Harvard Business School Working Paper.

Dimson, E., Karakaş, O., & Li, X. (2015). Active Ownership. The Review of Financial Studies, 28(12), 3225–3268.

Federal Ministry for Economic Cooperation and Development (BMZ). (2021). The German Supply Chain Due Diligence Act: Key facts for partner countries (Factsheet). https://www.bmz.de/resource/blob/154774/lieferkettengesetz-faktenpapier-partnerlaender-eng-bf.pdf

Gormsen, N. J., Huber, P., & Oh, S. (2024). Climate Capitalists. Winner of the 2024 Moskowitz Prize for Sustainable Finance.

O’Connor, A., Labowitz, S., & Wingender, P. (2017). Putting the “S” in ESG: Measuring Human Rights Performance for Investors. NYU Stern Center for Business and Human Rights.