Making ESG Work: How Investors Can Help Improve Low-Wage Labor And Ease Income Inequality

Making ESG Work
October 2021
The missing ‘S’ in ESG

The market for investment strategies that incorporate environmental, social, and governance (ESG) factors is booming, but the analysis of social factors remains limited and ill-defined. Investors are increasingly interested in closing this gap. To do so, asset managers and ESG data providers must overcome several hurdles. Most importantly, they must decide what social concerns to prioritize and begin to assess corporate social performance more rigorously. The Covid-19 pandemic has both exposed and exacerbated a growing economic divergence between high- and low-wage workers. We argue that investors should view this as a priority concern for the “S” in ESG and deepen their assessment of the quality of the low-wage work that companies rely on.

Bringing low-wage workers into social assessments

Beginning in the 1970s and 80s, shifting expectations of business, technological advances, and more porous national borders led many firms to outsource a growing share of the low-wage, labor-intensive work they rely on to third-party vendors or independent contractors. Outsourcing, both domestically and to other countries, is now a central ingredient of the business models of most large corporations. This restructuring of the workforce has allowed lead firms to specialize in the areas where they add most value and has helped to lift millions of people out of poverty by bringing jobs to emerging economies. But it has also contributed to rising levels of income inequality, most notably in advanced economies, and made the workforces that companies rely on more fragmented and opaque. The result is a mounting set of risks to workers, businesses, investors, and society.

A new approach to the ‘S’

Managing the risks of operational disruption and abusive labor practices that arise from outsourcing will require that businesses gather and disclose more information regarding the full workforce they depend on. Investors will similarly need to develop new approaches for evaluating the consequences of outsourcing — both for workers and for the long-term value of companies.  Our report offers a preliminary framework of metrics to help investors examine more carefully the relationship between outsourcing and corporate earnings and identify companies at greater risk of relying on abusive labor practices. These metrics are intended as a foundation for future conversations, testing, and development. Learn more about our recommended approach here.

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