July 06, 2006
Assessing Job Creation as a Social Indicator Correlating to Financial Performance
by Bill Baue
A new study from Switzerland-based Pictet & Cie argues that job creation eclipses all other labor
issues as a key indicator of corporate social responsibility, and measures its impact on returns.
In their latest report advancing an essentialist approach of identifying the most salient factors
in sustainable and responsible investing (SRI), Christoph Butz and Olivier Pictet of Geneva-based
Pictet & Cie focus on job creation as
the key indicator of companies' social responsibility. In explaining the rationale behind
their research methodology, they reveal a significant distinction between their approach and the
current trend in SRI of focusing on social and environmental issues that have a material financial
impact--in a footnote, of all places!
"A sustainability analysis that focuses only
on indicators that have a 'material' impact on the financial success of companies is incomplete and
ultimately even obsolete, since it does nothing more than a standard financial analysis, namely to
identify the most profitable companies," Messrs. Butz and Pictet write. "We would rather advocate
that sustainable investment should allow for inclusion of criteria that are desirable from a purely
sustainable point of view."
"Only then should all necessary financial techniques be
applied to allow the sustainability-oriented investor to invest accordingly without compromising on
risk and return," they add, and then proceed to apply financial analysis to their prioritized
criterion of job creation.
On the other end of the spectrum, Messrs. Butz and Pictet
criticize more ethically-oriented SRI practitioners for applying a diffusion of social indicators
instead of distilling down to the essential indicator--namely, job creation in their opinion.
"[W]ithin standard SRI research today . . . the creation or reduction of jobs is rarely taken
into account in a direct way, or, where it is, this important signal is buried under a heap of
other social indicators," they write. "Such an approach can be rightly criticized for 'fighting
the symptoms rather than the cause.'"
This medical metaphor assumes that curing the cause
cures the symptoms, but unfortunately, the mere creation of jobs does not solve workforce
homogeneity, gender inequality, racial and sexual orientation discrimination, labor rights abuses,
In the appendix, Messrs. Butz and Pictet transparently acknowledge
shortcomings of their approach.
"We do not pronounce judgment on the quality of jobs
created or destroyed," they admit. "We suppose that the jobs created are in accordance with all
"This assumption is defendable on the hypothesis that a large
multinational company--such as represented in the MSCI World--simply cannot afford to consistently
violate workers' rights without having to account for such misconduct sooner or later," they add.
It seems na´ve if not apologist to assume that the cost of accountability is a sufficient
deterrent of the temptation to profit from violating workers' rights, be it consistent or sporadic.
Furthermore, corporate social responsibility is all about exceeding legal obligations, not getting
around to meeting them eventually.
Nevertheless, Messrs. Butz and Pictet advance a very
comprehensive and well-considered methodology for testing the correlation between job creation and
financial performance, regardless of whether job creation is the most important social indicator or
just one of many. The study examines 1,677 companies in the MSCI World Index from 1997 to 2005,
comparing employment statistics to financial performance.
Acknowledging that findings can
vary significantly depending on the chosen methodology, Messrs. Butz and Pictet calculate job
creation by two different methodologies. "Equally-weighted scores" count all companies the same,
regardless of size, and "people-weighted scores" count larger companies more, given that a major
layoff by a huge company has a much greater societal impact than a small company firing a few
More importantly, the study applies two types of analytical techniques. An
"in-sample" analysis compares job creation at the end of the period to financial performance
throughout the period. An "out-of-sample" analysis compares job creation at the end of each year
to financial performance that year to avoid hindsight bias by examining only the data that an
investor would have had access to at the time.
"The results are not clear-cut," state
Messrs. Butz and Pictet. "Whereas a simple ('in-sample') backtracking appeared to suggest that we
are actually living in the 'best of all worlds,' where job and financial value creation go hand in
hand, a proper and methodologically more rigorous 'out-of-sample' simulation leaves us with a much
more ambiguous picture."
The "in-sample" methodology finds a financial outperformance of
about 15 percent over the full period for a portfolio that takes long positions in companies with
strong job creation scores (both equal- and people-weighted) and shorts companies with weak job
creation scores. However, the "out-of-sample" methodology results in a yearly underperformance of
0.44 percent for the people-weighted score and 1.29 percent for the equally-weighted score for the
period under investigation.
"An investment strategy targeting the creation of jobs would
thus have come at a certain price," Messrs. Butz and Pictet conclude.