Andrew Harmstone explains the investment implications for industry sectors in light of how the struggles of workers during the COVID-19 pandemic have brought into sharp focus long-standing social issues that are starting to have repercussions.
In late 2020, 94% of the world's entire workforce lived in countries with workplace closure measures in place due to the pandemic.
Essential workers—those on the front lines in health care, foods, staples, law enforcement and other vital services—have largely remained employed.
But many face struggles with employee benefits, such as paid sick leave. Among nonessential workers, employees have faced furloughs, difficult transitions to remote-working arrangements or terminations.
Sectors most resilient
• Consumer staples, overall, has been the least affected by workforce reduction policies. Many consumer staples companies are deemed essential and have been required to stay open during the pandemic. As a result, some temporarily increased the sizes of their workforces to meet a surge in demand for groceries and other necessities during the peak lockdowns.
• Technology companies have been able to capitalise on intensifying demand for products and software that facilitate remote working throughout the year. We believe this new working model will continue to be at least partially adopted in a post- COVID-19 world.
• Health care, also deemed essential in the pandemic, has benefitted from increased demand for pharmaceutical products/services.
Businesses with a mix of vulnerabilities
Within the consumer staples sector, there are some subsectors that have been more vulnerable to disruption from the pandemic.
• Food staples deemed ‘essential' have kept their shops open, but this has come at a cost as companies are required to ensure the safety of their front-line employees who are most at risk.
• Non essential brick and mortar retail businesses declined overall this past year. But as with food staples, those with strong online platforms were open for business and maintained a competitive advantage.
• E-commerce has been less dependent on government furlough schemes due to an increase in online purchases of staples, such as groceries, as well as some discretionary goods online. But companies have faced several social controversies related to implementing insufficient COVID-19 protection measures, reflecting poor human capital management.
Sectors feeling the most pain
Research into the pandemic layoff and hiring policies of 200 global large-cap companies shows that the nonessential labour-intensive industries, such as travel and tourism, have felt the most acute effects of COVID-19-related labour reduction policies.
• Airlines and hotels have heavily relied on government-funded furlough schemes and other workforce reduction policies throughout the pandemic. Recovery plans are intended to restore consumer confidence while supporting employees through contactless check-ins, COVID-19 guarantees (such as waived flight cancellation fees, travel vouchers, covered quarantine costs, etc.) and intensive cleaning protocols. These will be key to recovery for the airline and hotels industries.
• Tourism and travel have suffered the effects of government lockdowns and travel restrictions. Global tourism has declined by 60% and this could reach 80% if recovery measures are further delayed .
Policy response has helped
Crucial to alleviating the social stresses wrought by the pandemic have been governments' policy responses. Several Asian countries, such as China and Singapore, showed that stringent measures implemented decisively and early on—such as lockdowns or robust test and trace regimes—appeared to be highly effective. But most Western governments were much slower to act, allowing the coronavirus to spread aggressively.
According to the US Bureau of Labour Statistics, only 47% of private sector workers in the lowest income quartile have paid sick leave, compared to 90% for the highest quartile. These disparities are particularly apparent in the retail industry, as well as in accommodation and food services, which have a relatively high proportion of low-income employees.
The following chart shows that for a U.S. worker earning $30,000 per year, employers only paid an additional $2,652 on average toward mandated benefits, such as paid sick leave, childcare cover, health care insurance and unemployment insurance—less than 40% of the global and G7 averages (Chart 1).
Chart 1: Weak support for US workers
Source: UHY Consulting
Investing in employees is good business
Beyond government-supported measures, companies have also announced many different measures to support their workforce, such as employee bonuses, temporary pay increases, reduced retail opening hours or additional breaks during work hours, as well as improvements in paid sick leave policies.
However, all indications show that these are temporary offers in extraordinary circumstances. Companies that decide to extend these measures may prove themselves to be leaders in human capital management.
A shot in the arm for sustainable investing
Despite the many ills brought on by the COVID-19 pandemic, sustainable investing seems to be a beneficiary. During the early stages of the pandemic, investors sought "safe havens" in ESG. This trend continued into Q3, with record flows of $476bn into sustainable funds in November 2020 (+31% versus October).
Europe has historically been the dominant market for sustainable assets under management and it continued to attract the lion's share of global inflows at 83% of the $1.3trn total AUM, but the U.S. saw growth of +140% between October and September.
We anticipate continued significant growth in US ESG AUM, as President Biden's administration has proven it will support the introduction of more sustainable financial and climate-related regulation, opening new investment opportunities in renewable and clean energy, for example.
Influencing social outcomes
The decisions made by companies in response to the pandemic will have long-term financial and reputational effects on companies.
Through selective engagement with company management teams, we aim to influence policies and practices on human capital management and other social issues.
Using the COVID-19 response framework from the PRI as a guide, our priorities have focused on companies that are failing in crisis management or allowing harmful activities to persist or even worsen during the crisis.
Social metrics are more qualitative and harder to measure than environmental or governance issues.
Nonetheless, the pandemic has brought about a renewed focus on the social pillar of ESG and increased pressure on companies to improve disclosure around human capital.
Andrew Harmstone is head of Morgan Stanley Investment Management's global balanced risk control strategy
Rising incomes in Asia will probably be the most important investment story of the 2020s. Asia is home to 60% of the world's population, with both China and India each accounting for about 18% of the global total.