Achieving Sustainability
Engaging to shape a strong workforce
Until recently, climate change and corporate governance were a greater focus for investors than social issues. However, it is increasingly recognised that the “S” in ESG – including employee-related social concerns such as mental health and human rights – can represent material risks, and we are engaging with companies to address these topics.
Key takeaways
- Employee-related issues can have a material impact on company performance and should be an engagement priority.
- Our investee engagement focuses on four key, interconnected employee topics.
- Investor collaboration is a key element in tackling these issues, while better data and reporting regulations will accelerate employee-related engagement outcomes.
In recent years, the "S" in ESG (environmental, social and governance) has moved higher up the agenda for investors, driven in particular by employee-related issues. The Covid-19 pandemic has accelerated this shift by highlighting workforce challenges. Controversies, such as forced labour in retail supply chains, and the emergence of new regulations to foster responsible corporate behaviour, like the Corporate Sustainability Due Diligence Directive, contribute to this focus.
Integrating such social sustainability concerns into investment decision-making reflects our conviction as a sustainability-focused investor and is also supported by empirical evidence. Studies show the inclusion of social risks and opportunities in investment decisions can complement higher and more stable financial returns over the long term.1
Conversely, exposure to risks such as occupational accidents, high levels of sick leave or disruptions from protracted strikes can negatively impact both revenues and earnings. Additionally, failing to comply with health and safety standards or legal requirements can result in companies facing litigation, fines, compensation payouts and reputational risks.
We view employees as a key asset in shaping the long-term success of a company, and we engage with our investee companies on recruitment, retention and development of talent. We seek to understand whether employees are happy ¬– which typically means lower attrition rates – as we believe satisfied and healthy employees are ultimately more committed to their employer and more productive.
Employee issues as material risks
Our Stewardship Team analyses various dimensions of specific employee issues in investee companies, summarising the findings in our sustainability “company profiles”. Where we identify material risks for a company or sector, or want to start a thematic engagement project, we will engage with one or more companies to target specific outcomes. Our social engagements focus mainly on health and safety, diversity, equity and inclusion (DEI), talent acquisition and retention, the right to freedom of association, and human rights in the supply chain.
We believe governance of the “S” in ESG, including policies and practices to reinforce commitments, is vital. This includes understanding whether social topics such as employee development or DEI are discussed at board level and how certain social dimensions are linked to strategy. We also consider incentives and whether key social performance indicators are anchored in board or executive remuneration, or both. Our stewardship approach addresses the following issues:
Health and safety: Occupational safety is, perhaps, one of the most familiar social sustainability issues. Despite regulation existing in many countries, it remains a priority issue due to numerous recent controversies. Covid-19, the rapid evolution of reach of technology, and work pressures are causing higher incidences of mental health challenges. According to the World Health Organization, an estimated 12 billion working days are lost worldwide every year due to employee depression and anxiety – resulting in a productivity loss of USD 1 trillion. 2 A survey of 1,500 employees found the majority rated a healthy work culture as very or extremely helpful for their mental health.3
We have launched a dedicated mental health engagement project and signed the CCLA “Global Investor Statement on Workplace Mental Health”.4 The CCLA initiative targets disclosure by benchmarking companies on their approach to mental health in the workplace and can also serve as an engagement tool. CCLA has addressed CEOs of benchmarked companies to ensure that they are creating working conditions in which employees can thrive while also eliminating the avoidable costs associated with poor mental health.
DEI: Several studies have confirmed that companies with higher gender, ethnic and cultural diversity at board level perform better than their peers. However, we still see a considerable need for action. For example, there is a notable lack of diversity in the boardrooms of German listed companies where only 22% of DAX40 companies’ management boards are women5 and only one has a female CEO. On average, German companies’ gender diversity compares poorly to their European peers.6
Our commitment to promoting gender diversity through engagement extends to joining the 30% Club France Investor Group in 2021, and both co-founding and co-chairing the 30% Club Germany Investor Group. The aim of this collective investor initiative in Germany is to accelerate progress on gender balance. It focuses on engaging with DAX40 and MDAX companies on how to promote gender equality at senior decision-making levels – specifically the management board and supervisory board – and across their organisations. The target for DAX40 companies is to have women in at least 30% of management board seats by 2030.
Talent acquisition and retention: Following Covid-19, many economies continue to suffer workforce and skills shortages. Against the backdrop of demographic change in many developed markets, skills shortages continue to be an important issue, making the acquisition and retention of skilled workers both a competitive factor and a significant risk in many industries.
As an investor, we want to understand what actions companies take to increase employer attractiveness and how they promote and train their employees. We look to understand material risks around attrition and staff shortages by country and by business area and how companies address these.
Employee training also influences whether companies in industries characterised by fundamental transformation can provide their staff with employment opportunities in future operations (so-called just transition). Upskilling and reskilling are key in the automotive industry, for example, in the transition to electric vehicle production. We integrate the Just Transition into engagement activities in transitioning industries, such as, energy and automotive manufacturing.
Human rights in the supply chain: Responsible investment extends to working conditions7 throughout the supply chain. Our 2023 engagement project on this issue aimed to increase transparency around working conditions, and included development of a proprietary framework based on the OECD Due Diligence Guidance for Responsible Business Conduct. We found that a comprehensive, detailed and frequently reviewed risk assessment of the supply chain is a key driver for companies to onboard suppliers and manage their human rights issues.
Beginning this year, we will extend the reach of this engagement to address the persistent poverty of low-paid workers, starkly highlighted by Covid-19. Resonating with a recent announcement by a French multinational, we will engage on living wages and have joined the Living Wage Financials (PLWF) platform8 – a coalition of 21 international financial institutions. The coalition addresses over 50 companies from the clothing, footwear, agriculture and food industries to ensure they pay living wages and promote the living conditions of workers in their supply chains.
Data-driven engagement
Our engagement strategy is underpinned by detailed research and comprehensive data. Social sustainability reporting has improved in recent years primarily due to regulatory requirements and should improve further with the implementation of the EU Corporate Sustainability Reporting Directive.
In the meantime, collaborative engagement initiatives (eg, the CCLA) provide benchmarks and can bridge the gap in terms of missing data. This is not simply about reporting more data, but for companies to focus on information that is material to their business model and to report consistently over time. Adhering to established market standards helps to ensure comparability, to facilitate and use sustainability data for investment purposes.
However, the in-depth analysis required for social issues involves more meaningful data, such as key performance indicators for human rights in the supply chain, working conditions, remuneration and training. In some instances, key data points should be added to company reporting, eg, the gender pay gap at German companies. Lastly, audits, certifications and formal support for recognised international principles can serve as measures for strategic commitments.
Social sustainability – a strategic imperative
In analysing a comprehensive range of aspects of social sustainability, we go beyond the boundaries of company premises by extending to suppliers across far-reaching supply chains. Furthermore, the various employee-related aspects of social sustainability are closely interconnected, for example, the compatibility of family and career has implications for diversity, as does the topic of training. It is therefore important to understand whether companies address social issues related to employees holistically, led by sound governance and anchored in their strategy.
We welcome improved disclosure in line with international standards, which will enhance our ability to focus on material social issues and gain deeper insights into how companies handle employee matters.
1. A study by EY shows that companies with a lower accident rate statistically perform better financially: How can investment in EHS drive corporate success? Global EHS Maturity Study, February 2024. A study by McKinsey analysed that companies with diverse management teams are 25 % more likely to achieve above-average profitability than companies with less diverse teams: Diversity wins, How inclusion matters, May 2020. The European Central Bank (ECB) demonstrates that banks with greater gender diversity on their boards make more sustainable lending decisions, European Central Bank Gambacorta, L.; Pancotto, L.; Reghezza, A. und Spaggiari, M.: Gender diversity in bank boardrooms and green lending: evidence from euro area credit register data. No 2741/October 2022.
2. World Health Organization, Mental health at work, September 2024.
3. With 58% of respondents agreeing, this is the most important factor for their mental health. Mind Share Partners’ Mental Health at Work Report, 2023.
4. CCLA, https://www.ccla.co.uk/mental-health, 2024.
5. The DAX 40 is a stock market index consisting of the 40 major German blue chip companies trading on the Frankfurt Stock Exchange. MDAX includes the 50 Prime Standard shares that rank in size immediately below the companies included in the DAX index.
6. As of Q3 2023.
7. Allianz Global Investors, Human rights – the weakest link in supply chains? November 2023.
8. Platform Living Wage Financials, https://www.livingwage.nl/, 2024
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