This article summarises the key points made at a workshop regarding how signatories incorporate decent work and safeguard expectations into their capital allocation process.
The workshop was held on 8 December 2022 under Chatham House Rule and is the first in a two-part series on decent work. We gathered nine participants – a group of asset owners, investment managers and other stakeholders. The workshop was structured around a set of questions that were circulated prior to the event.
Organisations attending the workshop:
- UNI Global Union
- Aviva Investors
- Columbia Threadneedle Investments
- J.P. Morgan Asset Management
- MFS Investment Management
- Morgan Stanley Investment Management
- NN Investment Partners
For more on decent work, read our paper, ‘How investors can advance decent work’, published in July 2022. It outlines investors’ responsibility to respect human rights, including labour rights, as articulated by international human rights frameworks. The paper also explains what minimum safeguards are necessary to ensure decent work and drive outcomes in line with Sustainable Development Goal 8: decent work and economic growth.
The four key themes of the workshop are below:
1. Drivers of decent work across investment practices
Participants agreed that macroeconomic factors are some of the key drivers of incorporating decent work into capital allocation. These factors include rising inflation, income inequality and increasing living costs. The pandemic has also shone a light on the materiality of labour issues and reinforced the need for investors to safeguard labour rights, and for workers to earn a living wage.
The International Labour Organization identifies three key transitions affecting the future of work: the transition to a low-carbon economy, technological advances and demographic changes. In the workshop, these transitions were cited as key risks that credit investors need to consider. One signatory mentioned salient transition risks across the automotive and aviation sectors, as they are highly exposed to technological advances (in particular automation) and the transition to a low-carbon economy.
The macroeconomic setting has broadly raised awareness of the subject of decent work among portfolio managers; however, dialogue between ESG and sustainability and investment teams can strengthen knowledge. Workshop participants supported the need for increased dialogue to ensure portfolio managers are aware of decent work as a material factor in driving sustainable returns.
2. How signatories incorporate decent work across asset classes
The extent to which decent work is incorporated across asset classes varies quite significantly: significant factors include geography, limitations of voluntary disclosure, portfolio managers’ awareness and engagement, and how sophisticated a manager’s responsible investment practices are.
Equity and fixed income investors indicated that there is still a heavy reliance on screening. Some of the more common screening factors that fall under the decent work umbrella include the gender pay gap, and diversity, equity and inclusion; however, it is important for investors to consider screening factors across all the safeguard expectations. Screening can be carried out by service providers and participants indicated that an overall ESG score that includes decent work factors can be attributed to portfolio companies.
Screening is an important first step towards understanding where decent work risks may exist across an investible universe; however, comprehensive disclosure around decent work is still patchy and therefore screening may not necessarily capture all relevant factors.
Looking into more specific fixed income instruments, one signatory indicated that they were integrating decent work into instruments such as sustainability-linked bonds and SME financing; these bonds were used instead of / in conjunction with social bonds. As mentioned earlier, the future of work transitions are of particular importance for credit risk.
3. Engagement and disclosure are key to progress
Workers in the informal economy constitute 60% of the global workforce – they are disproportionately exposed to non-decent working conditions and lack access to social protections and other benefits.
Engaging with the informal economy is a challenging task for investors. One way is via sovereign bondholder engagement, for which participants agreed there was a greater need. Private market investors can also engage with the informal economy given that private companies can and do source informal workers. The challenge identified by private market signatories in this instance is the lack of disclosure.
Disclosure is crucial to identify and prioritise decent work issues. Participants agreed that increased regulation related to workforce disclosure will play a key role in making progress. However, challenges here include creating a level playing field across different markets i.e., ensuring consistent and comparable levels of mandatory disclosure.
Standardised disclosure is also lacking. One private markets participant pointed to the ESG Data Convergence Initiative, which seeks to achieve convergence on a standardised set of ESG metrics for private markets.
Collaborative engagements and voting remain key means to addressing decent work across portfolio companies. Participants highlighted several relevant initiatives:
- The Platform Living Wage Financials focuses on engaging on the topic of a living wage for workers in the garment and footwear, food retail and agrifood supply chains.
- The Investor Alliance for Human Rights was launched by the Interfaith Centre on Corporate Responsibility. It facilitates investor advocacy across a comprehensive range of human and labour rights issues.
Individual company engagement was also identified as a lever to address decent work; however, participants discussed the difficulties in mapping out, monitoring and maintaining up to date information on supply chains across a significant number of holdings. One participant indicated there is some hostility with larger US holdings that were reluctant to engage on issues such as a living wage.
One participant highlighted engagement with policy makers as a lever to address the gender pay gap and freedom of association.
4. Decent work efforts vary across geographies
The geography of signatories can affect how they approach the subject of decent work i.e., due to the local regulatory landscape.
In the UK, rising inflation and living costs, and their associated material risks, are driving portfolio managers to consider decent work more carefully. However, inflation is placing pressure on companies to cut costs, creating an opportunistic environment for portfolio managers to pursue short-term investment gains, ignoring larger systemic risks. Inequality as a broader systemic risk is at times overlooked.
More broadly in the EU, beneficiaries are becoming more aware of human rights issues and are starting to discuss labour rights. One participant indicated that stricter policies in the EU are posing challenges to EU companies that are facing limited disclosure, particularly in Asia.
In the Nordics, there is a greater awareness of decent work as a material issue. Nordic participants indicated that there is a focus on human rights and decent work in the tech supply chain, thanks to a recent initiative by the Danish Institute for Human Rights.