ESG Investing

Impact Investing for Employee Welfare


From the #MeToo movement to the changing nature of work itself, public attention has increasingly focused on the way companies treat their employees. The importance of employee welfare and well-being has not escaped investors, either, as investors are making human capital management one of their “engagement priorities.” In fact, Ernst & Young (EY) reports that over one-third of the investors they surveyed in 2018 said that labor and corporate culture issues should be a “top board focus,” compared to just 6% in 2015.

Investing and Employee Welfare

According to EY, human capital and culture, along with other “invisible assets,” make up an estimated 52% of a company’s market value. Especially in a competitive employment landscape, this means that thoughtful human capital management practices—or their absence—could have a tangible effect on a company’s bottom line.

The Sustainability Accounting Standards Board’s (SASB) Materiality Map identifies the labor issues most likely to impact the financial or operational health of organizations across industries. For example:

  • Labor practices, including adhering to labor laws and promoting human rights, may be material to a range of sectors, from hospitality to coal operations to electronic manufacturing services.
  • Employee health and safety are likely to have some level of materiality to most industries, but especially extractives and mineral processing, infrastructure, and transportation.
  • Employee engagement, diversity, and inclusion may be material to technology and communications, as well as subsectors like e-commerce, asset management, and investment banking, among others.

At the same time, these issues have clear relevance as nonfinancial factors under the “S” umbrella of an environmental, social, and governance (ESG) framework. For instance, Domini Impact Investments is an ESG investment advisor that recognizes the importance of employee relations as a social factor. Domini characterizes employees as “perhaps the most critical” of the “key stakeholder groups that corporations depend upon to operate and generate profits.” In its investment selection process and shareholder engagement efforts, Domini emphasizes issues of compensation, diversity, training, unionization, and health and safety.

To make an impact on employee welfare, investors need to know where and how to target their efforts.

The Role of Data

To make an impact on employee welfare, investors need to know where and how to target their efforts. While companies tend to provide some information on their human capital practices through corporate social responsibility statements, EY notes that these voluntary disclosures leave some room for improvement.

Fortunately, third parties have increased access to critical ESG-related data. For example, Equileap releases an annual report grading companies on over a dozen gender-equity factors. Meanwhile, KnowTheChain publishes benchmarks evaluating companies in three sectors—information and communications technology, food and beverage, and apparel and footwear—on their use of forced labor in their supply chains.

Investors are also using their leverage as shareholders to gain insight into companies’ employment practices. For example, Trillium Asset Management has filed several proposals asking companies for better diversity reporting (and practices), while BlackRock’s direct dialogue approach “seek[s] to be constructive while asking probing questions” about human capital management data and processes.

Looking ahead, investors could find themselves with more access to this kind of information, as the Securities and Exchange Commission considers a proposal that would make human capital management a required topic of disclosure, according to IR Magazine.

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