Impact Voices | October 19, 2022

Employees: The Missing ‘E’ in ESG

Margot Brandenburg, Bob Eccles and Leo Strine

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Guest Author

Margot Brandenburg

Guest Author

Bob Eccles

Guest Author

Leo Strine

Workers, the people most important to capitalism, have been buried in the ‘S’ in ESG, for  environmental, social, and governance risk factors in business and investing.

More conversations – and actions – need to consider how best to emphasize employees. One idea: updating the moniker to “Double ESG,” or EESG, to put workers at the forefront. 

There is near-universal public support for focusing on a company’s impact on its workers. Surveys of the American people, such as one released last month by the nonprofit organization Just Capital, consistently find that Americans believe workers to be business’s most important stakeholder by a significant margin. Politicians on both sides of the aisle claim their party is the party of workers. Large institutional investors and business leaders talk frequently about the war for talent, which has grown more acute in the past two years. 

And yet the way a company manages its workers, its human capital, is usually underrepresented in ESG disclosures, investment strategies, and advocacy. For example, only 15% of companies in the United States disclose wage data, and even fewer report on benefits costs, worker retention and training initiatives. 

Public companies are required to disclose executive compensation, but – without better disclosure about how companies pay their workers at each level – neither boards nor investors can understand whether an overall pay plan has been optimized for productivity.

These disclosures need not be onerous or expensive. In fact, companies are required to provide some of this information to the government already, such as in EE-01 filings that break down a company’s demographic and job category data. There is an acute need for greater transparency around how companies compensate and manage their workers. This could be done by efficient quartile disclosure, which requires companies to provide data on the pay, benefits, and types of jobs held by the workers in their company, including those who regularly labor through company contractors, and the demographic composition of the workforce. 

This type of concrete information will allow companies to benchmark themselves against their competitors and relevant peers, investors to value these factors, and workers themselves to decide where to work. As important, it would allow boards and investors to better situate executive compensation within the context of an overall plan to appropriately incentivize and pay the whole workforce, not just the C-Suite.

The SEC is expected to issue a human capital disclosure proposal, perhaps even in the coming months, and we hope but don’t know that it will include critical information of this kind. Regardless, the imperative for better human capital data is greater than a single SEC rulemaking.

Inadequate data 

There are also not enough constituents advocating for worker-related disclosures or investment strategies. Although there exist sizable and effective organizations advocating for business and investor action on climate change, there are few organizations and resources being directed toward worker-related strategies, targets, and disclosures. Institutional investors have lagged in their focus on the people most vital to our economy, the workers who fuel it, and whose 401(k) and college savings accounts have driven the growth of those institutions.

Not surprisingly, a lack of data and demand have resulted in very few investment strategies that center on investing in companies with the most human ingenuity and productivity. The Ford Foundation’s Mission Investments team has been actively seeking to invest endowment capital in funds that focus on creating ‘quality jobs’ over the past five years, and the positive impact on workers and economic growth has been encouraging. But opportunities in this area have been relatively few thus far, particularly compared to its otherwise robust pipeline and portfolio.

This lack of job-related data, demand and products is bad for workers, investors, and companies. 

First, most innovative companies state that their workforce is their greatest source of value. In 1975, for instance, the market value of ‘intangible assets,’ including human capital, accounted for 17% of the S&P500’s value. By 2020, they represented 90%. It is disturbing, then, that Gallup’s annual survey on employee engagement finds that roughly one in five U.S. workers reports being “actively disengaged” at work and close to half report “not being engaged,” despite the critical role they play in corporate value. 

Even for senior management teams eager to change those feelings, most companies lack the data to track and benchmark worker engagement, retention, and upskilling – measurements that could better guide their efforts to raise the value of those intangible assets. Investments in worker-related data collection would be an important first step toward changing that tide.

Fair gainsharing

Second, neglect of workers has fueled massive inequality. While workers experienced strong real wage growth from 1945 to 1980, real wages of American workers declined by 3% between 1981 – 2014 despite a large increase in productivity. Meanwhile, wages for the top 1% increased 176% over that period. Even during the first 22 months of the pandemic, when essential workers were being widely celebrated, a Brookings study of 22 industry-leading companies found that the combined seven million workers at those companies earned only 2% of the value that accrued to shareholders during that same period. 

This rise in income inequality has created a widening wealth gap. Data from the Federal Reserve System show that in 1983 the top one percent had 23.5% of assets, those in the 90-99th percentile had 37.3%, and the bottom 50% had 3.7%. In Q1 of 2022 those numbers were, respectively, 31.8%, 37.3%, and 2.8%. 

This level of inequality is unsustainable, hurts communities of color the most, and it’s bad for our democracy as well as the economy: research has documented the significant increases in political polarization that accompany even incremental increases in the Gini coefficient, economists’ preferred measure of economic inequality.  

Third, the lack of quality data about the pay of and investments in employees imperils even the most seasoned ESG and impact investors. It is extremely difficult for them and those who are just now testing out ESG and impact investing strategies to evaluate how successfully companies are investing in their workforces. Given the direct and immediate impact of employment practices on millions of American families, ESG investors would broaden their base of support by focusing more on workers. If hardworking taxpayers and voters can see themselves in ESG strategies, they are much more likely to favor them. 

Mainstream private equity recently put a stake in the ground for workers by launching Ownership Works, a nonprofit organization that “partners with companies and investors to provide all employees with the opportunity to build wealth at work.” It aims to create $20 billion of wealth for workers in the next 10 years. We hope to see other key constituents in the capital markets demonstrate similar leadership.  

All members of our economy stand to benefit when workers are treated as important stakeholders. A productive economy, one that works better for us and the planet over the long term, is built on the collective recognition that companies are made up of workers. Investments in workers are investments in increasing corporate value, spurring economic growth, and protecting democracy.

Margot Brandenburg is a senior program officer at Ford Foundation.

Bob Eccles is a visiting professor of management practice at Saïd Business School.

Leo Strine is the former chief justice of the Delaware Supreme Court.