Analysis of the Relationship between ESG and Labour Costs: The Moderating Effect of the Legal Tradition

This study examines the relationship between Environmental, Social, and Governance (ESG) scores and labor costs per employee (LCE) in firms operat- ing under different legal traditions, specifically comparing civil law (France) and common law (United Kingdom) countries. Utilizing data from the Orbis database for the period 2020–2022, the study employs random-effects estimations with robust standard errors. Results indicate that while the relationship between ESG and LCE is not significant in common law, it is positively significant in civil law. Results are robust to alternative ESG measures, such as the social pillar score (SOCP) estimations methods and samples. The findings suggest that the legal tradition moderates the ESG-LCE relationship, with stronger positive effects ob- served in civil law countries. The study highlights the importance of legal frame- works in shaping the economic impacts of ESG initiatives on labor costs. While ESG concerns may result in higher LCE, and thus increased employee compensa- tion, implementing appropriate regulations to protect workers’ rights can foster a more effective ESG-LCE relationship than relying solely on market-based regu- latory systems driven by stakeholder influence.