The sustainability wage gap

A large literature documents a positive correlation between a firm's sustainability or ESG policies and firm value. However, the exact mechanism through which this relation arises remains ambiguous and it is often hard to establish the direction of causation. In this paper we propose and test the Sustainability Wage Gap channel through which firms can benefit from ESG investments by their ability to pay lower wages because of workers' preferences for sustainable jobs. Using administrative employer-employee matched data from Sweden and a new measure that quantifies the environmental sustainability of different economic activities, we show that workers earn between 10-20% lower wages in more sustainable sectors. Motivated by survey evidence on the heterogeneity of workers' preferences for sustainable jobs, we also show that this Sustainability Wage Gap is larger for highly talented workers and increasing over time. Providing a battery of additional tests, we argue that our evidence is difficult to reconcile with most alternative interpretations that have been suggested by previous literature