February 16, 2021
February 16, 2021
The struggles of workers during the COVID-19 pandemic have brought into sharp focus long-standing social issues that are starting to have repercussions. In late 2020, 94% of the world’s entire workforce lived in countries with workplace closure measures in place due to the pandemic.1 Essential workers—those on the front lines in health care, foods, staples, law enforcement and other vital services—have largely remained employed. But many face struggles with employee benefits, such as paid sick leave. Among nonessential workers, employees have faced furloughs, difficult transitions to remote-working arrangements or terminations.
Here we explore how these labour issues are playing out across sectors and regions. Not surprisingly, they have the potential to impact companies’ profitability and our investment decisions.
Unevenly spread across sectors
No sector of the economy has escaped the impact of the coronavirus, or COVID-19, but its effects have been uneven. Workforce reduction policies in the industrial and consumer discretionary sectors have in aggregate accounted for nearly 60% of all impacted employees worldwide, compared to only 2% from the consumer staples sector (Display 1). On balance, though, low-income workers are more vulnerable than higher-paid workers.
Source: AlphaSense Data. As of July 2020.
Sectors most resistant
Business with a mix of vulnerabilities
Within the consumer staples sector, there are some subsectors that have been more vulnerable to disruption from the virus. There is a gap between essential and nonessential retail, as well as between traditional brick-and-mortar retail and e-commerce.
Interestingly, these companies’ human capital risks have increased because they have hired more workers to meet increased demand, which in turn means greater responsibility to provide for their welfare. Companies following best practices have implemented paid leave for those testing positive for the virus and have allowed workers to take unlimited unpaid time off, without fear of layoffs.4 Measures to support workers have also included an increase in safety requirements, such as the provision of personal protective equipment (PPE), facilities cleaning and COVID-19 testing,5 as well as compensating employees for heightened risks via higher wages.
Sectors feelings of the most pain
Research into the pandemic layoff and hiring policies of 200 global large-cap companies shows that the nonessential labour-intensive industries, such as travel and tourism, have felt the most acute effects of COVID-19-related labour reduction policies. Government lockdowns, travel restrictions and lack of flexible working models have severely curtailed their activity.6
Source: OECD Tourism Trends and Policies, 2020, https://doi.org/10.1787/6b47b985-en
While the start of widespread vaccination rollouts has given a glimmer of hope that the recovery for these sectors is in sight for 2021, it is still too early for companies to reverse pandemic layoff and hiring policies.
Policy response has helped
Crucial to alleviating the social stresses wrought by the pandemic have been governments’ policy responses. Several Asian countries showed that stringent measures, implemented decisively early on—such as lockdowns or robust test and trace regimes—appeared to be highly effective. But most Western governments were much slower to act, allowing the coronavirus to spread aggressively. The consequences have been rising infection rates and additional COVID-19 waves, higher mortality, and decelerating economic activity.
By providing support to companies and employees whose futures were threatened by coronavirus-related lockdowns, central banks and governments have stepped up to the plate. Led by the Federal Reserve, policy makers in the U.S. and across Europe acted swiftly to mitigate labour market disruptions. The persistence of the pandemic and rising unemployment suggest we will see a continuation of global financial and policy interventions into 2021 and beyond. For example, the European Central Bank recently announced its intention to increase and extend its COVID-19-related stimulus programme into 2022.10
Few safety nets in the U.S. …
At a regional level, the pandemic has highlighted the stark gap between the U.S. and other developed economies. Compared to Europe—where unemployment has been contained by government-funded furlough schemes covering a large percentage of employee wages11—the U.S. has seen an unprecedented spike in unemployment.
Consequently, the U.S. government, through the extended CARES Act, announced a $2 trillion fiscal stimulus package earlier in 2020 to support small businesses and individual taxpayers as well as to expand unemployment insurance.12 Furthermore, in December, outgoing President Trump signed a $900 billion pandemic relief bill, triggering the flow of aid to individuals and businesses. Despite offering roughly half the support provided in March 2020, the package was very encouraging news for U.S. households.
Still, there are relatively few permanent safety nets in the U.S. compared to Europe: Out of the 35 OECD member countries, 32 have some form of universal health care, yet most Americans rely on their employers for health insurance. According to the Kaiser Family Foundation,13 the average health insurance policy for families in the U.S. cost $21,000 in 2019, with employers who provide this insurance typically paying 70% of that amount, or on average $14,700. For an employee earning, say, $150,000, to their employer this represents a relatively small proportion of the total cost of employing them. However, for a lower-wage worker earning half the median wage, it represents a much higher proportion of the total costs of employing them—as much as 60%—so their employers are less likely to offer this insurance.
… especially for low-income workers
This asymmetrical impact leads to headwinds for low-income segments of the workforce. According to the U.S. Bureau of Labour Statistics, only 47% of private sector workers in the lowest income quartile have paid sick leave, compared to 90% for the highest quartile.14 These disparities are particularly apparent in the retail industry, as well as in accommodation and food services, which have a relatively high proportion of low-income employees.
The following table shows that for a U.S. worker earning $30,000 per year, employers only paid an additional $2,652 toward mandated benefits, such as paid sick leave, child care cover, health care insurance and unemployment insurance—less than 40% of the global and G7 averages (Display 3). These benefits are given disproportionately to middle- and higher-income earners, who are typically full-time workers, and unfortunately exclude large pockets of the workforce, such as independent contractors, part-time workers or those who are self-employed.
Source: UHY Consulting, https://www.uhy.com/employers-now-pay-average-employment-costs-worth-nearly-25-of-employees-salaries/.
The lack of these safety nets has arguably been a competitive disadvantage for the U.S. in terms of its ability to manage the spread of the virus and its socioeconomic consequences. Looking forward, with the Biden administration taking office, we expect to see stronger social policy proposals, including a minimum wage increase, paid sick leave and increasing access to affordable health care.15 These measures would bring relief to a broad spectrum of workers and, with the Democrats effectively winning control of the U.S. Senate in the Georgia runoff election on 6 January, the new Biden administration will have a better chance of implementing some of these measures.
Companies that have anticipated these policy changes, for example by already increasing the minimum wage to the recommended $15 per hour, will be well-positioned to manage the additional investment and capital allocation required. We believe that such companies will in turn be more attractive to investors, both from an ESG and a financial perspective.
Investing in employees is good business
Beyond government-supported measures, companies have also announced many different measures to support their workforce, such as employee bonuses, temporary pay increases, reduced retail opening hours or additional breaks during work hours, as well as improvements in paid sick leave policies. However, all indications show that these are temporary offers in extraordinary circumstances. Companies that decide to extend these measures may prove themselves to be leaders in human capital management.
In ‘Different People: Human Capital Management and Diversity’,16 published in 2018, we established a link between human capital management, employee satisfaction and a company’s profitability. Companies that provide additional and permanent improvements in employee protection measures will incur costs, but we believe these costs will be more than offset by the long-term benefits for employees, employers and shareholders.
A shot in the arm for sustainable investing
Despite the many ills brought on by the COVID-19 pandemic, sustainable investing seems to be a beneficiary. During the early stages of the pandemic, investors sought “safe havens” in ESG. This trend continued into Q3, with record flows of $476 billion into sustainable funds in November 2020 (+31% versus October).17
Europe has historically been the dominant market for sustainable assets under management and it continued to attract the lion’s share of global inflows at 83% of the $1.3 trillion total AUM, but the U.S. saw growth of +140% between October and September.18 We anticipate continued significant growth in U.S. ESG AUM, as the Biden administration is expected to support the introduction of more sustainable financial and climate-related regulation, opening new investment opportunities in renewable and clean energy, for example.
Many ESG funds also outperformed their traditional counterparts19 during the periods of severe volatility in 2020. In many cases, their overweight positions in technology and healthcare—the two economic sectors that benefited the most during the pandemic—helped fuel performance.20 So did their typical underweights in carbon intensive sectors, such as energy and utilities, which were relatively weak performers. By choosing ESG-oriented investments, investors are gaining exposure to companies that better manage ESG risks and opportunities— including those related to human capital. In heightened periods of market volatility, better risk management can translate into fewer and less severe controversies, ultimately enhancing the potential for helping preserve capital and better returns.
Influencing social outcomes
The decisions made by companies in response to the pandemic will have long-term financial and reputational effects on companies. Through selective engagement with company managements, we aim to influence policies and practices on human capital management and other social issues. Using the COVID-19 response framework from the PRI21 as a guide, our priorities have focused on companies that are failing in crisis management or allowing harmful activities to persist or even worsen during the crisis.
Social metrics are more qualitative and harder to measure than environmental or governance issues. Nonetheless, the pandemic has brought about a renewed focus on the social pillar of ESG and increased pressure on companies to improve disclosure around human capital.
In our view, this is a positive development for companies, their employees and shareholders. We will continue to engage with boards to improve their management practices and disclosure on social issues in a post-pandemic world.
ESG Strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.
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