COVID-19 and the ensuing financial crisis represent an unprecedented challenge for the U.S. economy. With record numbers of unemployment claims and historic market point drops, even the most seasoned investors may feel at a loss. However, investors can continue to use the same best practices to guide their decisions even in these volatile times. One practice with particular relevance in this moment is considering a firm’s approach to environmental, social, and governance (ESG) issues.
For some time, there has been growing evidence that firms that hold themselves to high ESG standards deliver higher returns. This advantage holds especially true now: ESG funds have demonstrated greater resilience than other ETFs as COVID-19 economic impacts have worsened. ESG funds have seen lower outflows compared to equities overall and have remained net-positive year-to-date. Morningstar data show that between mid-February and mid-March, 39% of sustainable equity funds ranked in their category’s top quartile, and RBC Capital Markets shows that companies with better ESG risk profiles outperform their peers even when controlling for sector representation.
As the pandemic has upended markets and revealed financial vulnerabilities, it has subsequently elevated key ESG issues. Kara Mangone, Chief Operating Officer of Goldman Sachs’ Sustainable Finance Group, mentioned in a recent interview that early results point to the “S” factors of ESG as driving the differentiation in firm success.
“What we’re starting to see play out is that how well a company can manage through a crisis period across a variety of these ‘S’ or social elements [is] now going to be more clearly linked to the way that investors think about that company’s long-term financial sustainability.”
—Kara Mangone, Chief Operating Officer of Goldman Sachs’ Sustainable Finance Group
The actions firms take toward their workers in this moment can have both tangible financial ramifications as well as more indirect reputational consequences. Now more than ever before, firms must consider their social risks, such as the health, safety, and wellbeing of their workers. As Commonwealth has long discussed, worker financial security is an additional key measure of a firm’s social performance. According to our research, worker financial security can significantly impact stress and productivity and, as a result, have a tangible impact on a company’s operations.
According to S&P Global, “strong ESG performers with stakeholder-focused and adaptive-governance structures are likely to remain resilient” in this time of uncertainty. The materiality of ESG-related risks is now clear. Firms have an opportunity to improve their workers’ financial security, and by consequence their own company’s outcomes. Investors can benefit by prioritizing worker financial security, and actively promoting it as a priority with the companies they invest in.
Below, we outline why supporting worker financial security makes companies stronger and, as a result, why these companies make for better investments during COVID-19.
Greater Brand Trust
Consumers believe the quality of support that frontline workers receive should be commensurate with the pivotal value of their service—and they are paying close attention to which employers act in keeping with that belief. An Edelman survey on consumer trust found that 27% of US consumers “have convinced other people to stop using a brand that [they] felt was not acting appropriately in response to the pandemic,” and 29% have “recently started using a new brand because of the innovative or compassionate way they have responded.” Supporting workers’ needs will elicit consumer response.
Improved Worker Productivity
A MetLife study found that 1 in 3 employees admit to being less productive at work because of their financial stress, a proportion that will only increase during this crisis as more workers and their families fall on hard times. The same study estimates that for a company of 10,000 employees, this financial stress results in $28,830 in lost productivity every week, or a total of $250 billion across the economy each year. By offering solutions to reduce worker financial concerns, employers can reduce these losses.
Easier Rehiring and Recovery
Not every company will be able to retain all workers through this crisis. For those planning to hire or rehire later on, a track record of strong worker support would help drive up applications, speeding a company’s recovery and allowing it to scale back up more smoothly.
Improved Hiring and Retention of Essential Workers
For firms providing essential goods and services, supporting employees’ financial security attracts job applicants and reduces turnover, which in turn helps companies stay competitive during heightened consumer demand. We’ve seen some grocery stores that lack sufficient staff be forced to reduce their hours to allow time to restock. Limited hours and unstocked items may push consumers, who look for reliable service on their infrequent shopping trips, towards competing stores.
Companies around the country are looking for ways to cut costs and adapt. However, it would be an expensive mistake to view worker financial security initiatives as superfluous. Investors can still push for a stronger and healthier investment by advocating for worker financial security and investing in firms that use research-backed strategies to support their employees. Such strategies can include connecting workers to innovative emergency savings products with features like prize-linked savings, allowing for splitting direct deposits into multiple accounts, and setting up employee hardship funds.
To weather this financial storm, investing in firms that prioritize worker financial security will likely result in better returns. Investors can boost their own bottom lines even further by advocating for these choices among companies already in their portfolios. Taking these steps will help all members of the economy—workers, employers, and investors alike—come through this crisis stronger for it.
To learn more about the work Commonwealth is doing with investors and the connection between investment materiality and worker financial security, contact Nick Maynard at info@buildcommonwealth.org.