ESG Viewpoint: COVID-19 and labour-related impacts

Labour issues are likely the biggest corporate theme resulting from the pandemic, with the impact on workers not being felt evenly. Discover the issues workers have been facing and learn about our engagement on social practices.
June 2020
  • Labour issues are likely the biggest corporate theme resulting from the pandemic; the momentum needs to be grasped by investors and multi-stakeholder initiatives alike
  • Companies that had not been managing their social issues well took longer to adjust to the new situation, demonstrating the business case for good social management

The evidence that labour issues should be front and centre for businesses and societies alike is vast. We know that if social risks are not managed effectively, they fuel rising inequality and hamper progress towards securing decent work for all. There is also evidence that companies with lower staff turnover rates, higher employee satisfaction levels and better gender and ethnic diversity across the workforce often see more favourable financial returns than their counterparts1.

We have long believed that strong labour standards can have a positive impact on corporate performance: better reputation, increased customer satisfaction and higher sales, enhanced employee satisfaction and lower injuries or turnover rates. The current COVID-19 crisis has shown just that. A recent study by Harvard Business School2 indicated that during a market collapse as experienced at the beginning of the pandemic, firms responding with a focus on stakeholders outperform their competitors.

COVID-19 has brought social issues into sharper focus. We think that those companies that had not been managing their social issues well took longer to adjust to the new situation, their workers suffered more, experienced higher likelihood of being infected, and strikes were more prevalent3 too. Existing concerns, such as the lack of paid sick leave, have been aggravated by the pandemic.

 

The social impacts of COVID-19

The impact of the COVID-19 pandemic on workers has not been felt evenly. The implications for worker welfare differ significantly depending on the sector, the jurisdiction, and the nature of jobs. In our observations, we distinguish between three categories:

1 Customer-facing businesses
2 Businesses where working from home is possible
3 Broader supply chain impacts and consequences for workers

 

Customer-facing businesses

These can be split between those that provide essential and non-essential services. Essential services, including food producers4, retailers and pharmacies, have remained open during the lockdown across many jurisdictions. Key risks include increased exposure to the virus and general employee safety. Increased union activity5 and strikes are an indication that labour standards might be deteriorating. Non-essential services, such as restaurants and apparel stores, have had to close their high street operations. Key risks here are around job losses and lack of supply chain continuity once the business can re-start.

Nina Roth

Director, Analyst, Responsible Investment

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Tim Bonds

Analyst

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Let’s talk about risk

The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

The implications of COVID-19 for worker welfare differ significantly depending on the sector, the jurisdiction, and the nature of jobs.

Working from home

Most white-collar offices quickly needed to enact working-from-home protocols. However, concerns have arisen around workforce productivity6, exacerbated by limited childcare options as parents juggle work and home schooling. Whilst cutting out commuting is saving time and lowering stress levels, IT functionality, as well as limited room and equipment availability, might have the opposite effect. With women taking on a disproportionate share of caring responsibilities in many households7, this could have long-term knock on effects on gender diversity within corporations, unless mitigated by strong support measures. Support staff, such as catering, facilities, or cleaning, might be heavily affected by furloughing or lay-offs.

 

Supply chain impacts

Faced with unprecedented demand for some products and plummeting demand for others, the negative effects felt by supply chains include cancelled contracts, extended payment lead times and thus loss of liquidity to pay for alreadyexecuted work, millions of jobs lost8, lack of appropriate workers (as in agriculture), and pressure from buyers with ongoing sales to reopen factories despite domestic shutdown, leading to enhanced occupational health and safety risks. With, for example, the lack of auditing due to travel restrictions, as well as labour laws being suspended, already low labour standards might decrease further – such as has been the case in the Indian state Uttar Pradash9.

 

Our engagement approach

In March 2020, BMO Global Asset Management released a statement on “Expectations for social practices”10, in which we outlined our core expectations around social issues, building on three main pillars: respect human rights, uphold labour rights, and safeguard public health. The statement also covered other aspects, some particularly relevant as part of our COVID-19 engagement response:

  • Provision of a healthy and safe work environment
  • Provision of fair wages
  • Responsible business conduct (including tax transparency)
  • Effective stakeholder engagement
  • Respect for freedom of association and collective bargaining

Engagement on COVID-19 responses now forms a regular part of our day-to-day engagement dialogue with companies. Dependent on the company, region and sector, we call for measures in areas including:

  • Occupational health and safety, including the provision of protective gear
  • Paid sick leave, especially in jurisdictions such as the US where there is no government mandate
  • Flexible shift work for those not able to work from home/remotely
  • Flexibility and adjustment in expectations for home-working staff who are impacted by childcare closures
  • Pay premiums for workers that are deemed essential
  • The provision of mental health support.

We see a clear business case for taking a progressive approach on these issues: workers experiencing physical or mental health difficulties are less likely to be able to perform their tasks, causing disruptions to business continuity; additional pressure through a lack of flexibility in a stressful pandemic environment will limit employee satisfaction, performance, and loyalty; fair wages ensure that no ‘distracting’ additional jobs are necessary, basic needs are paid for, and retention rates increase. Failure to respect worker rights can also be harmful to corporate reputations, particularly for consumer-facing businesses.

On the positive side, the response to our labour-related engagement has been better than expected, with many companies installing physical distancing measures, providing at least some protective gear, and enabling remote work where possible. Paid sick leave and pay premiums have also been commonplace – but many are time-limited, with some companies already announcing their end11. In our engagement, we highlight the need to make these changes last as overall social benefits, which can lead to positive returns for the company.

There have also been some enhanced transparency around corporate COVID-19 responses. Some companies have dedicated websites, for the first time acknowledging the relevance of their workers as crucial for their business; others have proactively approached investors about their responses.

The response to our engagement has been better than expected, with many companies installing physical distancing measures, providing at least some protective gear, and enabling remote work where possible.

Engaging on supply chain management and underlying social issues has been more difficult, as transparency is very limited. Particularly worrying reports continue to emerge from the apparel industry: buyers do not stick to existing contracts; physical distancing is not an option in cramped factories; pay is being diminished; and payment lead times are extended, leaving companies without enough money to pay their staff. All this will have negative effects on workers and their ability to live and work, meaning that once the pandemic is under control, it will be more difficult for producers to pick up order inflows.

In response to these concerns, our engagement with companies in key sectors such as apparel has encouraged them to take responsibility for the impact their decisions are having on their supply chain, and asked them to take measures, including:

  • Providing more transparency around supply chain management and actions taken
  • Ensuring payment for products already produced
  • Arranging early payment of suppliers and not extending payment lead times
  • Upholding labour standards, and considering remote audits

 


In focus: The effect of COVID-19 on the retail sector


Building on our engagement project on the living wage within the retail sector12, we have explored how our focus companies for this project have adapted their business operations to COVID-19 constraints.

 

Global food retailers Costco, Dollar General, Dollar Tree, Loblaw, Tesco and Walmart have remained open to the general public throughout widespread lockdown. Our key concern here is around employee safety. For those that have remained closed on the high street – apparel giant Fast Retailing and consumer electronics company CECONOMY – we have placed greater emphasis on how they have managed their supply chains in the face of dwindling demand. Business-to-business food distributor Sysco, faced with customer restrictions in the form of restaurant closures, has switched focus to supplying grocery retailers.

We began monitoring these retailers towards the end of March 2020, with COVID-19 updates and enhanced business communications seen across the board – some providing daily updates, and a small subset proactively reaching out to us, as investors, to share more details.

Across the food retailers, we have been pleased to see significant safety measures being deployed in-store almost universally, though generally with a two-week time-lag from the onset of lockdown. We will look to engage further on these measures within non-essential stores as restrictions begin to be lifted.

Additional employee support has been provided both in monetary terms (increased hourly pay (e.g. Dollar Tree) and onetime bonuses (e.g. Walmart)) and general wellbeing (sick leave provisions (e.g. Loblaw) and expanded mental health support (e.g. Tesco)). However, we continue to engage on the former, in tandem with our living wage project, to encourage companies to keep these pay premiums beyond the pandemic. We will ask companies to evaluate the benefits, consult their employees, and make these changes permanent. We also hope to see further flexibility for shift workers, especially those dealing with limited childcare options as schools remain closed.

Perhaps less visible is the knock-on effect felt by supply chains. We believe there must be a concerted effort from retailers to work with their supply chain networks to deal with changing wholesale and retail demands during this period. Whilst we have seen some positive examples of this (e.g. Tesco), sadly, there are still reports of retailers reneging on supplier contracts (e.g. Asda, Walmart’s subsidiary) or extending payment lead times. Fast Retailing has been addressing their supply chains from both a financial and worker safety standpoint13, including overall enhanced transparency.

 

Summary of COVID-19 responses

Retailer HQ Country Responsiveness to BMO engagement Protective gear Sick leave provisions Pay premiums Mental health support Supply chain mgmt.

Costco

USA

*

X

X

X

X

X

Dollar General

USA

***

X

X

X

X

X

Dollar Tree

USA

No response

X

X

X

X

X

Walmart

USA

**

X

X

X

X

X

Sysco

USA

***

X

X

X

X

X

Tesco

UK

***

X

X

X

X

X

Loblaw

Canada

***

X

X

X

X

X

CECONOMY

Germany

No response

N/A

N/A

N/A

X

X

Fast Retailing

Japan

***

N/A

N/A

N/A

X

X

As at 30 April 2020.

***Had an engagement call and/or in-depth email correspondence, **Email feedback received, *Call requested & accepted, not taken place yet. No response = no response

Further measures taken by retailers above and beyond the scope of labour issues discussed here, including priority shopping hours for the vulnerable (e.g. Dollar General) and healthcare workers (e.g. Costco), enhanced delivery options for those stuck in isolation (e.g. Tesco) and philanthropic acts (e.g. Walmart), have all served to boost the reputations and consumer trust of these brands in such uncertain times.

 

Outlook

The post-virus labour situation is likely to be very different to that at the start of 2020: fewer jobs, extensive home working where industry allows and even a lack of labour laws for years to come in some regions. It will become all the more important for investors to engage more thoroughly on social aspects, and ensure corporations commit to upholding labour standards, reporting transparently on their efforts and competing for a race to the top, and not otherwise.

1 https://shareaction.org/why-its-time-to-talk-about-the-s-in-environmental-social-and-governance-principles/
2 Harvard Business School Accounting & Management Unit Working Paper No. 20-108 , https://papers.ssrn.com/
sol3/papers.cfm?abstract_id=3578167
3 https://www.aljazeera.com/ajimpact/coronavirus-fight-worker-unions-aggressive-200417212003336.html
4 See also our recent Viewpoint on COVID19 and food production
5 https://www.theguardian.com/world/2020/may/06/us-union-activism-spikesamid-coronavirus
6 https://news.stanford.edu/2020/03/30/productivity-pitfalls-working-home-agecovid-19/
7 https://www.theguardian.com/world/2020/may/27/working-mothersinterrupted-more-often-than-fathers-in-lockdown-study
8 “Two million Bangladesh jobs ‘at risk’ as clothes orders dry up “ https://www.bbc.co.uk/news/world-asia-52417822
9 https://www.mondaq.com/india/employment-and-workforce-wellbeing/935398/suspension-of-labour-laws-amidst-covid-19
10 https://www.bmogam.com/wp-content/uploads/2020/03/expectations-for-socialpolicies.pdf
11 Say goodbye to ‘hero pay’ Korger tells workers, May 2020 https://nymag.com/intelligencer/2020/05/say-goodbye-to-hero-pay-kroger-tells-workers.html
12 <https://www.bmogam.com/gb-en/intermediary/news-and-insights/esg-viewpoint-living-wage-in-the-retail-sector/>
13 Fast Retailing recognizes that one of our most important responsibilities is to protect the security and safety of the people who help to make our clothes.<https://www.fastretailing.com/eng/sustainability/news/2004221500.html>

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