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The New E in ESG

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The way companies approach employee wellbeing is a critical test of their culture. Can they come through the current crisis with a strong and more meaningful workplace culture – or will Covid-19 expose it as an empty gesture? 

‘Our people are our greatest asset.’ Never has a corporate cliché been so tested. When revenues dried up, shops closed and demand stalled during the coronavirus crisis, just how much of an asset were those people?

The response from businesses to the economic shock of Covid-19 was a test not only of their financial durability, but also of their values and culture. Analysis of saints and sinners – their corporate policies, practices and benefits – has been forensic, and includes the work of Just Capital, whose Covid-19 Corporate Response Tracker assesses the response of America’s largest employers.1

The spotlight has been kinder on some more than others. IBM, for instance, was praised for its Work from Home pledge, penned by CEO Arvind Krishna, which promised to help colleagues adjust to the new situation.2 Slack CEO Stewart Butterfield, meanwhile, said in an internal memo to staff: “Take care of yourselves, take care of your families, be a good partner. It is fine to work irregular or reduced hours. It is fine to take time out when you need it.”3

It’s that ‘tide goes out’ moment: who has got really robust models that mean that even through this really difficult time they are doing the right thing?

Alan Edington

Google and Microsoft were among many companies that have been alert to the particular pressures on working parents, offering additional paid leave for parents who had to work without access to their usual childcare arrangements and while home-schooling.4 And Google, like many others, also offered additional payments to staff to alleviate any financial burden associated with working from home, recognising that financial pressures on top of other factors might impact mental health.5 Much closer to the virus frontline, NHS staff were given free access to a range of wellbeing apps until the end of 2020 to support their mental health.6

“There’s no doubt that there are good actors and less good actors that have been exposed by the pandemic,” says Alan Edington, Co-Head of Research at Walter Scott. “It’s that ‘tide goes out’ moment: who has got really robust models that mean that even through this really difficult time they are doing the right thing? As with green-washing, there is danger that rhetoric does not equate with action when it comes to employee wellbeing.”

That gap can often be great. A company that promises to look after its employee wellbeing one moment talks about cost-cutting and automation in the next. “A company may say, ‘We’ve got an extensive wellbeing programme for our employees with access, through our outsourced provider, to all sorts of support’, says Edington. “That might be meaningful, and it might not.” It may even be a way to distract from other serious workforce issues.

The pandemic is a real test for the stakeholder capitalism model, and how well companies define the ‘Social’ in ESG – in particular, how they treat their staff and protect their physical and mental wellbeing. Recent research suggests that investors are also watching carefully, and a significant majority say that it is important that their money is invested in companies that care about employee wellbeing.7

Under pressure

Such scrutiny comes at a time of heightened anxiety among workers. A survey of 500 employees in the UK conducted at the start of the pandemic8 revealed that a fifth had increased their alcohol consumption, a third were eating a less healthy diet, and over half were exercising less. The majority reported losing sleep because of worry. A survey of more than 2,000 employees in Australia, France, Germany, New Zealand, Singapore, the UK and the US, meanwhile, found that 44% of those who were now working from home said their mental health had declined.9

These findings come less than 12 months after the World Health Organization recognised burn-out as an official workplace phenomenon.10 And according to a report from the UK Health and Safety Executive, stress, depression or anxiety were the cause of 44% of cases of work-related ill health and 57% of working days lost due to ill health in 2017/18.11 In August this year, more than 30 businesses signed a pledge to prioritise mental health as employees returned to work.12

Everyone will have their own take, but if the response from the CEO, management team and office floor is broadly similar, and delivered with enthusiasm, you can see that it will pervade the culture.

Alan Edington

What can businesses do to spot the warning signs of employee burn-out and anxiety? How can management teams, and the investors who place their trust in them, sense a problem with employee wellbeing?

“One of the questions we ask of a company is: is it run just a bit too hot?” says Edington. “When you see margins marching up year over year, when you see a company’s operating profit per employee march upwards year over year, you start to ask the question: Is this actually a good thing across stakeholder groups? Are proper procedures being compromised? What does the culture look like?”

Early-warning system

Businesses can look at KPIs, of course, such as the rate of employee attrition, or how a company is addressing staff turnover. But one of the best ways to get a sense of the culture is to experience the company at every level. “It’s one of the great reasons to walk a factory floor or go to a company’s store,” says Edington. “Is what we’re hearing from the management team filtering down throughout the organisation?”

Often a good litmus test of a coherent culture is the use of language within the organisation. If you ask a range of employees what the company does and what it stands for, you should be able to see signals of a set of shared beliefs. “Everyone will have their own take, but if the response from the CEO, management team and office floor is broadly similar, and delivered with enthusiasm, you can see that it will pervade the culture,” says Edington. “You can use it as a proxy.”

Some say that it is the ability of employees to have their ideas heard that can help create this shared sense of purpose. “Devolving decision-making to the front line and increasing localisation forced leaders [during the pandemic] to trust their people to know what to do,” say Cath Bishop and Margaret Heffernan in the Financial Times.13 “They haven’t been disappointed. Where sharing responsibility might have felt a risk, now it’s an obvious asset.”

This is why it is impossible to separate culture from the financials of a business. “We take a holistic view of a company and if it has a questionable culture, then that feeds into the perspective on how we think about it,” says Edington. “The reason we’re asking these questions is long-term sustainability: is the business building a workforce that will allow it to be successful in the future? And that comes down to how you treat them.

“Keeping employees healthy and happy and productive just makes business sense.”

Sources:
1 https://justcapital.com/reports/the-covid-19-corporate-response-tracker-how-americas-largest-employers-are-treating-stakeholders-amid-the-coronavirus-crisis/
2 https://www.linkedin.com/pulse/i-pledge-support-my-fellow-ibmers-working-from-home-during-krishna/
3 https://www.cnbc.com/2020/03/26/slack-ceo-to-employees-amid-covid-19-dont-stress-about-work.html
4 https://www.hcamag.com/us/specialization/benefits/microsoft-and-google-expand-covid-19-leave-benefits/220102
5 https://www.cnbc.com/2020/05/26/google-will-give-employees-up-to-1000-to-buy-work-from-home-gear.html
6 https://www.nhsemployers.org/news/2020/03/free-access-to-wellbeing-apps-for-all-nhs-staff
7 https://www.lcp.uk.com/media-centre/2020/02/lcpyougov-employee-wellbeing-tops-list-of-esg-concerns/
8 https://www.employment-studies.co.uk/resource/ies-working-home-wellbeing-survey
9 https://www.qualtrics.com/blog/confronting-mental-health/
10 https://www.who.int/bulletin/volumes/97/9/19-020919/en/
11 http://www.hse.gov.uk/statistics/overall/hssh1718.pdf
12 https://www.thetimes.co.uk/edition/business/mental-health-is-a-priority-lfd27dr3b
13 https://www.ft.com/content/84d92de1-3eff-4178-b070-cd9eb013dba3

Important Information
This article is provided for general information only and should not be construed as investment advice or a recommendation. This information does not represent and must not be construed as an offer or a solicitation of an offer to buy or sell securities, commodities and/or any other financial instruments or products. This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such an offer or solicitation is unlawful or not authorised.

Stock Examples
The information provided in this article relating to stock examples should not be considered a recommendation to buy or sell any particular security. Any examples discussed are given in the context of the theme being explored.

This article is from Walter Scott’s Research Journal 11 (October 2020).

Alan Edington
Co-Head of Research