As funds focused on environmental, social and governance issues evolve, a new report says investors need to pay more attention to the “S” in ESG, especially how investing decisions impact low-wage workers.
When funds consider ESG factors, the criteria they use often focus on easier-to-measure environmental factors (the “E”), but gloss over the social aspects of companies’ practices, according to a New York University Stern Center for Business and Human Rights report released this week.
“The growing hardship experienced by low-wage workers is a mounting social and economic crisis,” says the report titled “Making ESG work: How investors can help improve low-wage labor and ease income inequality.” It hits amid myriad U.S. worker actions across industries during a month dubbed “Striketober.”
Though the report acknowledges that raising wages and improving conditions for workers would lead to increased costs for companies, possibly lowering investor returns, “the pandemic has really been eye-opening to a lot of people, in terms of the precarious lives low-wage workers lead around the world,” said author and researcher Casey O’Connor-Willis, in an interview with MarketWatch.
“There are changes in worker responses and organizing that may shift the calculus for traditional investors,” she said.
The report is both history lesson and a call for action to asset owners and managers, ESG ratings providers and governments that determine investment-reporting requirements. It summarizes how in the past few decades, corporations — and in turn, investors — have gotten richer by outsourcing work to far-flung places and using third-party vendors, which surrenders much of the ability to enforce good “social” practices. And, more recently, many jobs go to independent contractors instead of employees.
“The ride-sharing company Uber is the most famous example of this practice,” she writes in the report. “It now relies on 227 independent drivers for every full-time worker it employs.”
Ride-hailing drivers for Uber Technologies Inc.
have fluctuating wages, little to no benefits and lack employee protections like unemployment insurance. Uber, whose business model relies on low labor costs, has consistently fought to avoid treating drivers as employees despite legal and legislative challenges around the world. Yet, the report notes that shares of Uber are among the holdings of the most popular ESG exchange-traded fund, BlackRock’s iShares ESG Aware USA ETF
which has $22.4 billion in assets under management. That’s because asset managers rely on ESG data and ratings sold by third parties whose criteria aren’t clear, nor always made public.
Other big labor outsourcers mentioned in the report include Google
whose contractors comprise more than half its workforce, and Marriott International Inc.
which runs fewer than 30% of its hotels. In addition, the report notes that large conglomerates operate with a wide supply network that leaves labor decisions to others: Unilever PLC
has nearly 60,000 suppliers in 161 countries, and Walmart Inc.
has 25,800 facilities being used by its suppliers in more than 100 countries.
NYU’s Stern Center for Business and Human Rights is taking action itself by working on a framework that fund managers can use to more adequately assess labor and human-rights risks. It looks at three main factors: whether the company has heightened incentives for cost-cutting; whether there’s a huge imbalance in the company’s relationship with its suppliers; and the company’s exposure to vulnerable workers.
O’Connor-Willis said over the next year the center will model different metrics for its framework, plus consult with experts, asset managers and focus groups and make adjustments as needed.
She also pointed out that even when investors consider the “S” in ESG, they usually focus on reining in executive compensation, or diversity at the top and in companies’ professional workforces — not the low-wage workers who often aren’t even considered employees.
“This is another dimension of inequality that has come to the fore,” O’Connor-Willis said.
Dieter Waizenegger, executive director of SOC Investment Group, which works with pension funds to hold company boards accountable to ethical corporate behavior, said he agrees that the “S” in ESG needs more “rigorous attention by investors.”
And he said it’s not a given that improving worker conditions will lead to lower investing returns: “Without better data, how do we know that improved worker productivity wouldn’t lead to better long-term performance?”