We are used now to talk about the carbon footprint of our activities, including the carbon footprint of our investments. But activities and investments have many other impacts on the world, they have many other footprints. Until we begin to assess these, we risk continuing to ignore them. One of those we need to consider much more actively is the social footprint. We need to capture this because the systemic nature of global inequalities – the world’s unfairness – is, alongside climate change, the other great systemic risk for us all, including for investment institutions.
To help investors, particularly the large asset owners, consider their exposures to the risks associated with global unfairness, and start to consider approaches to mitigating and managing them, we need to be measuring the social footprint of their investments.
This consideration is brought forcefully to mind by a recent excellent report by my friends at the High Pay Centre on behalf of dear colleagues at CIPD, PLSA and RailPen, How do companies report on their ‘most important asset’?. Playing on the corporate trope that employees are so often said to be a company’s most important asset, the report contrasts this with the substance with which companies tend to discuss workforce issues – or the lack of such substance. Naturally I was taken by the starting words of the executive summary:
“A company’s workforce is central to its long-term success. The provision of secure, safe, fulfilling and fairly-paid work should therefore be a priority for companies.”
The report highlights disappointing gaps in the reporting on company workforces, but notes some good practice – with leading FTSE companies providing disclosures and data such as:
- Employee turnover, skills, training and recruitment
- Accident and fatality rates; mental health statistics
- Trade union relations, and other information on giving workers a collective voice
- Links between workforce and strategy, as well as inclusion of workforce statistics in company targets and risks
While the report notes substantial gaps, it is unfortunately fair to say that UK-listed companies are generally better at reporting on such matters than many private companies and by others around the world, not least because the Corporate Governance Code calls for workforce reporting. The gaps in reporting from other companies are still more substantial. As the report calls for, I tend to use the term workforce to encompass all those working to deliver on a company’s business model, regardless of the legal niceties of the contract between the company and them. The term means that, for example, contractors and gig workers are not excluded from consideration.
Rachel Kay from the High Pay Centre followed up the report with an energetic blog post railing at the excess of narrative reporting and the limited data that companies disclose on workforce issues. While personally I am a fan of narrative reporting – when done well, it can inform investors and other stakeholders very fully and fairly about the individual circumstances of a company – the simple fact is that it is rarely done well. And the lack of concrete data makes poor narrative reporting worse than useless. What’s more, having spent the last year thinking exclusively from the asset owner perspective, I’m acutely conscious that from a portfolio level only data matters: narratives about individual companies simply cannot be aggregated. What’s more, only certain data is capable of being aggregated.
This is the gift that climate reporting has given us. Through the lens of TCFD (the Task Force on Climate-Related Financial Disclosures, the group fostered by the gnomes of Basle to help the world comprehend the challenge of climate change and report on it consistently), we have seen that it is possible to aggregate reporting on climate change issues across funds aggregating many company holdings and across portfolios encompassing multiple funds. The fungibility of CO2 emissions globally and the ability to calculate carbon footprints and intensities in terms of tonnes of CO2 equivalent mean that we can have such a broad oversight. The term carbon footprint has become meaningful.
The term social footprint is not yet meaningful. To make it meaningful, we need a measure that is genuinely capable of being aggregated across companies and across portfolios. None of those highlighted in the recent CIPD/PLSA/RailPen report deliver on that – all of those considered are currently too tailored to the company to be meaningful if aggregated.
My starting suggestion for measures that are capable of being aggregated are more simple, as they need to be if they are to apply across companies in a range of sectors and in a range of geographies. That suggestion is:
- The number of full-time equivalents in the company’s workforce
- The proportion of them who are paid enough to fund a decent life for a family
Neither of these measures is straightforward: calculating full-time equivalents from the variations of flexible work can be a challenge, let alone the difficulties of considering the positions of consultants and gig economy workers. The concept of decent pay – usually termed a living wage – has been subject to ongoing debate, but that means that there have been multiple calculations and assessments across the globe (which is necessary to make international reporting make sense).
Despite these complexities, hopefully the aim of these metrics is clear and their value is also. Their simplicity is clear: more jobs are worthwhile, but only if they pay a decent wage. Only if we have more such jobs will the world become a fairer place. These metrics are not intended as a substitute for more detailed reporting on workforce matters that are tailored to company-specific business models; they are a proposed supplement to it, to enable an aggregated social footprint to be calculated. They are the starting point for a social footprinting of global investment portfolios.
A recent presentation that I was party to, but sadly cannot share publicly, indicates how far we need to travel to deliver on the promise of fair pay for all workers that the living wage calculation represents. An assessment of the extent of underpayment around the world, through the Global Impact Database at the Impact Institute, showed extensive unfair pay, not just in supply chains but within company operations and in what the analysis calls their downstream activities.
Perhaps most surprising was the company-by-company analysis of underpayments, across companies included in the MSCI World index. This showed that Apple had by far the worst social footprint. Issues within its supply chain are perhaps well-known, but it was also found to have extensive underpayments in its employee base and downstream. In spite of pitching itself as a luxury brand with prices to match, the company apparently does not see the need to pay its workers a fair wage – not even its employees a fair wage. Some might suggest that Apple could be still more successful had it chosen to pay its workforce more fairly. An alternative interpretation is that this is actually a sign that a portion of Apple’s profits are only illusory: if it did but choose to pay its workforce enough to live on, its operating margin would not be the current generous 30%. This puts debates about the fairness of the company’s executive pay further into context.
It seems to me somehow fitting that I post this blog on Maundy Thursday, the date where by tradition the British monarch humbly gives small gifts of money to paupers. Fairness should not be dependent on the wealthy making occasional honourable donations from their wealth to those deemed the worthy poor, but the world seems we have moved on less than we might hope from the time of bad King John (the first monarch recorded to have made Maundy donations, a few years before his disgruntled barons forced him to increase fairness and the Rule of Law by signing Magna Carta).
See also: Better ways of showing how people matter
How do companies report on their ‘most important asset’?, Chartered Institute of Personnel & Development, Pensions & Lifetime Savings Association and RailPen, March 8 2022
Report launch webinar, March 8 2022