In our previous articles we discussed how climate change and cyber security/data privacy are two important material environmental, social and governance (ESG) factors that can impact the risk levels and potential returns of a given investment. Another ESG factor that is particularly critical in today’s market and economic landscape, especially considering COVID-19, is employee health and safety.

There is truth to the saying that a company is only as good as its people. How an organization manages its employees can be a source of long-term material strength or weakness, which will ultimately impact investors.

Why employee management is an investment issue

How a company recruits, retains and develops its workforce can be one of the most important determinants of its future performance and can serve as a source of material investment risk and/or future opportunity, particularly in the COVID-19 era. Employee management can impact a company’s performance in the following ways:

• Competitive advantage: In many industries and geographic regions, qualified workers may be in short supply. Employers that can better attract, retain and develop employees are in a better position to outperform.
• Legal/regulatory compliance: Companies that engage in poor or unlawful labour practices risk prosecution, financial losses, poor performance and/or reputational and brand damage.
• Organizational resilience: Companies that are already leaders in employee health and safety can be better positioned for any future global shock events (e.g., a possible future wave of COVID-19) that may impact them and their industries.
• Health and safety: Unhealthy or dangerous working conditions present a critical risk to employees. The COVID-19 pandemic has focused considerable attention on employee health and safety, especially in industries in which unsafe conditions for frontline workers could have severe consequences.

Employee management and ESG investing in action

Employee issues can vary greatly according to industry and region. However, the types of disclosure asset managers seek from company management teams generally fall within these themes¹:

• Labour practices: Do the company’s policies and practices facilitate good working relationships with its labour force? This can include financial compensation, compliance with laws and regulations and general employee satisfaction. This theme can extend beyond the direct employees of the company to the labour force embedded in its supply chain (e.g., the employees of an external supplier or contractor).
• Health and safety: Do working conditions preserve employee well-being and minimize the chance of on-the-job health and safety incidents? Such concerns have become more pronounced in the COVID-19 era, in which a company’s policies on social distancing, protective equipment and general sanitation can prevent the highly infectious coronavirus from spreading within its labour force and to the general public.
• Employee engagement and development: Can the company not only hire talent, but develop it further to meet the company’s future needs and facilitate its growth? ESG disclosure might include the effectiveness of the company’s policies and practices to improve employee engagement, productivity, innovation and retention. Company culture and commitment to diversity can also be key engagement factors.
• Response to COVID-19: How did the company act during the initial outbreak of COVID-19? How is it continuing to respond to the health and safety challenges of the pandemic? Investors have become increasingly focused on how companies have responded to COVID-19, from the working conditions for frontline workers to facilitating remote working when possible, applying ethically and strategically sound labour force rightsizing policies and promoting a company-wide culture of commitment to health and safety.
• Quality of leadership: The commitment of a company’s senior management and board directors to fostering a company culture that places paramount importance on health and safety has always been important but has come under greater scrutiny recently. Safeguarding the welfare of employees at all times means an organization is better able to weather unexpected events and can recover from them faster.

Employee management aligned to company performance

Companies that engage in effective management of employees set themselves up for potentially enhanced productivity, innovation and, ultimately, business results. All of these positive effects will eventually flow to investors, which is why RBC GAM makes employee management a cornerstone of its ESG engagement.

For additional perspectives on RBC GAM’s ESG-driven investing, see our previous articles on climate change and cyber security/data privacy. For more information about RBC GAM and ESG engagement, visit https://www.rbcgam.com/ri.

¹ Developed based on research from MSCI ESG Ratings Methodology and SASB Materiality Map and industry reports.