Does Office Work Mean Better Returns? It's Complicated

For most investors the pandemic will feel like a distant bad dream now, so does a return to the office (of sorts) have any discernable impact on portfolios?

Kate Lin 19 September, 2023 | 11:01AM
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Waterloo station

The impact of the Covid-19 pandemic has changed more than just healthcare. One of the more obvious ways life has changed is in the way we work. From home? Or from the office?

While this question might seem one for human resource departments alone, it also matters to investors. Fresh research by Schroders finds a positive correlation between human capital returns and excess returns above benchmark indices across various sectors.

According to Mervyn Tang, head of sustainability for Asia pacific at Schroders, there are many components an active investor would look at to gauge an investee's human capital performance:

• Overall workforce strategy and culture;

• Talent development;

• Compensation and benefits;

• Incentive structure and performance measurement;

• Succession planning.

Which Aspects of the Social Pillar Hold Financial Materiality?

Some critical questions follow: how do we determine which parts of the so-called "social pillar" hold financial materiality? Is there a definitive line between right and wrong? The answer is unclear.

Taking working from home as an example, Tang says: "remote working is one of those things where scientific data is not going to tell you which one is better. It’s going to be dependent on a workforce as well as a particular business [...]. All these things add up to specific considerations for individual markets in terms of how this materialises.”

"The thing where we would want to see companies have a clear enough policy to be able to define that, to be able to articulate what they're looking to do, how they also think about measuring that," he continues.

"If they measured productivity, have they seen a change based on remote work, or have they not? That's going to vary because it’s much easier to do remotely for an IT company, versus a restaurant, for example."

Finding Hidden Financial Risks Through the Social Lens

The complexity and nuance associated with social issues, as compared to climate or corporate governance measurements, make disclosures critical in performing meaningful comparisons and judgments.

Tang thinks a lot of this relies on getting information and data from investee companies. On human capital management, "the answer is not always to raise wages," he says. Wage and salary, from an investment standpoint, have a cost to it, but Tang also considers accrued costs to a company.

"If you pay workers too little, then you get to a point where they might end up needing three jobs to live and then their productivity comes crashing down," he says.

"That's the problem [...]. The flipside is if you keep wages down, the unintended cost of that decision may not be fully captured in the financials and will materialise later.

"For a lot of sustainability considerations, we're trying to think about things that are not so tangible and cannot easily be captured by the financial metrics but may play out financially in the future."

The bottom line is a company should also have tools in place to monitor this, such as regular employee satisfaction surveys that they can make use of to understand how it changes over time and whether there are specific departments that are being affected.

Social Pillar Isn't Purely Qualitative or Quantitative

Quantitative accounting metrics and qualitative techniques go hand-in-hand to refine the understanding of human capital management’s contribution to an investee’s returns and productivity.

Tang says: "This is [a] very social focus, but it’s also hard for a company to realise its own problems. Maybe they look at turnover numbers going up, but they might not know what happened.

"Just because the number is high or low, it doesn't necessarily say this is a red flag for the company or this is a problem. But it does allow us to ask the question and make the analysis."

And based on what’s quantitative, an active investor can talk to the company management and understand the situation. This is the starting point of getting to know the issue – whether this is "a risk and opportunity or just a statistical artefact."

Context, Context, Context

One of the data points Tang looks at for human capital assessment is web-scraping data from Glassdoor reviews. The company offers workers everywhere the chance to give honest feedback about their employer's management, policies, and culture, among other things.

"We want to know: has there been positive or negative sentiment over time and have people been quitting the company?" asks Tang.

At some point during Covid-19, his monitoring stumbled on an Australian healthcare company that experienced an exceptionally high increase in employee departure. Like analysing a company's financial fundamentals, ESG-aware investors should identify structural and cyclical factors like this in a bid to see what could affect it.

With the Glassdoor data on hand, his team probed the situation.

"The company gave us more information on the quality of its policies when it comes to employee retention and the benefits it has been offering," he says.

"It assured us this was effectively a one-off [event], driven by Covid-19. It was quite a specific set of circumstances that the company was facing then.

"That’s an example where models and data give us a bit of information that we then check for that insight trying to drive outcomes. This is more than we have some specific desire for the company to do something in mind."

Pain Points to Monitor

Elsewhere, examples are many where human capital issues can be more than just transitory.

Walking out of the pandemic, he thinks there are some stress points facing investees while the investment and ESG teams have focused on determining whether companies have done enough in their social pillar.

"As a very Hong Kong-specific example, where apartments are smaller, if I compare it to let's say Singapore, the pressure of working from home in Hong Kong can be more painful than working from home in Singapore, just because of the size of the average apartment," he says.

While there’s recognition from companies that now is a difficult time for workers, the cost of living globally continues to be on Tang's radar, in terms of how inflationary prices of living have to do with workers' livelihoods and human capital management of the investees.  

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About Author

Kate Lin  is an Editor for Morningstar Asia, and is based in Hong Kong

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