The Business Case for Investing in Companies That Treat Their Workers Well

When investors search for ethical stocks to invest in, they may naturally focus on what a company sells, its environmental impact, or the industries it supports. We believe another important part of the analysis is how a company treats the people responsible for operating the business every day.

Worker treatment can include compensation, benefits, workplace safety, career development, work-life balance, communication, inclusion, and opportunities for advancement. We believe these factors can be considered alongside traditional financial measures when evaluating whether a company deserves a place in a values-aligned portfolio.

Importantly, treating employees well does not guarantee investment success. No individual workforce policy can eliminate market risk, competitive pressures, poor management, or other factors that may affect a company's performance. But we believe there may be a business case for paying attention to human capital.

Why Workers May Matter to Investors

For many businesses, employees are closely connected to the company's ability to serve customers, develop products, maintain operations, and execute its strategy. As we see it, a business that struggles to recruit, retain, or motivate qualified employees could potentially face challenges that eventually affect its financial performance.

The importance of human capital has also received attention from U.S. regulators. In 2020, the Securities and Exchange Commission amended Regulation S-K to include, as a disclosure topic, “a description of the registrant's human capital resources” when that information is material to understanding the business.

The SEC's accompanying discussion stated that human capital can be “an important driver of long-term value” for companies in various industries.

We believe this provides investors with another reason to consider workforce practices as part of a broader investment analysis rather than viewing them solely as an ethical concern.

Employee Satisfaction and Investment Performance

Some academic research has examined whether employee satisfaction and investment performance may be connected.

Research by Alex Edmans examining companies included in the “100 Best Companies to Work For in America” found that a portfolio of those companies earned an “annual four-factor alpha of 3.5% from 1984-2009”. The research also reported performance of “2.1% above industry benchmarks.”

These historical findings should not be interpreted to mean that companies with satisfied employees will outperform in the future. We believe they instead demonstrate why employee satisfaction may be worth examining as one potential component of investment research.

A separate international study examined 3,446 firms across 43 countries between 2003 and 2014. Its abstract reports that firms with a more employee-friendly culture “are valued higher and perform better (ROA, ROE).”

Again, correlation or findings from historical research should not be treated as a promise of future returns. Market conditions, valuation, company fundamentals, industry dynamics, and many other factors may influence investment outcomes.

Worker Investment and Business Fundamentals

The potential business case for treating workers well may extend beyond stock-price performance.

JUST Capital analyzed 875 companies included in its 2017 rankings and subsequently examined their 2018 profitability. The organization reported that its highest-ranked companies generated “a Return-on-Equity (ROE) 6.4 percentage points higher than their peers.”

Its analysis also identified worker-related practices among factors associated with net margins, including providing access to health insurance, supporting work-life balance, communicating transparently with employees, and paying a living wage.

We believe findings like these can provide useful questions for investors to consider. Does a company invest in its workforce? Does management view employees primarily as an expense, or as an important part of creating long-term value? Are workplace practices potentially supporting or undermining the company's ability to execute its strategy?

The answers may not determine whether an investment is appropriate, but we believe they can contribute to a more complete picture of the business.

Retention and Employee Development Can Matter

Employee turnover may also be worth considering when researching ethical stocks to invest in.

Research from McKinsey Global Institute found that companies it classified as “P+P Winners” had “attrition rates almost five percentage points lower” than companies categorized as Performance-Driven Companies.

JUST Capital describes workforce advancement using measures such as employee training, tuition reimbursement, retention rates, and internal hiring rates. Its Workers research also evaluates areas including wages, worker well-being, benefits, work-life balance, advancement, training, and workplace inclusion.

We believe these kinds of measures may help investors move beyond broad labels and examine specific company practices.

For example, a company that provides meaningful career development may potentially create stronger internal talent pipelines. A business with competitive compensation and benefits may potentially find it easier to retain experienced employees. These possibilities do not guarantee superior financial results, but we believe they can be relevant when evaluating how a company manages an important part of its operations.

Ethical Investing Does Not Mean Ignoring Financial Analysis

Searching for ethical stocks to invest in should not, in our view, mean choosing companies solely because they appear to have positive workplace policies.

A company may treat workers well and still have an unattractive valuation, excessive debt, weak competitive positioning, declining demand, poor governance, or other financial risks. Conversely, a financially successful company may have workplace practices that conflict with an investor's personal values.

We believe values-aligned investing can involve examining both sides of the equation.

That could include traditional considerations such as financial condition, valuation, competitive position, and portfolio diversification, while also considering how a company treats employees, customers, communities, and other stakeholders.

The objective, as we see it, is not to assume that an ethical characteristic automatically makes a company a good investment. Instead, it is to determine whether financial considerations and an investor's values can be evaluated together.

Looking Beyond an ESG Score

We believe investors interested in worker treatment may also want to look deeper than a company's overall ESG rating.

Different rating systems may use different methodologies, and a broad score may not necessarily answer the specific questions an investor cares about. We believe direct research into workforce policies and disclosures can potentially provide additional context.

Depending on what matters to the investor, questions could include whether the company provides competitive wages and benefits, invests in employee development, supports workplace safety, reports employee turnover, provides advancement opportunities, or demonstrates meaningful accountability for workforce practices.

As we understand it, this approach treats employee practices as part of company analysis rather than as a simple screening exercise.

Building a Portfolio Around Both Values and Financial Goals

At Holistic Finance, we believe investing can involve more than identifying companies with attractive financial characteristics. It can also involve understanding what an investor wants their money to support.

For someone searching for ethical stocks to invest in, worker treatment may be one piece of that process. Some investors may care particularly about wages and benefits. Others may prioritize workplace safety, employee advancement, diversity, environmental responsibility, animal welfare, or other issues.

There is no guarantee that a portfolio incorporating these considerations will outperform a conventional portfolio. All investing involves risk, including the possible loss of principal.

We believe the more useful question is whether investors can build portfolios that consider financial objectives while also being intentional about the businesses they own.

The Takeaway

Research does not establish that treating workers well guarantees superior investment returns. However, evidence examining employee satisfaction, human capital, profitability, and retention suggest that workforce practices may deserve consideration as part of a broader company analysis.

At Holistic Finance, we believe investors should not necessarily have to separate their financial goals from their values. Our approach considers traditional investment factors alongside the environmental, social, workplace, and ethical issues that matter to each client.

For investors researching ethical stocks to invest in, looking at how companies treat their workers can potentially add another valuable dimension to the investment process. The goal is not simply to find companies that appear ethical. We believe it is to thoughtfully evaluate businesses and build a portfolio designed around both the investor's financial objectives and the impact they want their money to have.

Disclosures

This article is provided for general informational and educational purposes only and should not be construed as individualized investment, financial, tax or legal advice. References to responsible investment are educational and do not constitute a recommendation of any particular security, investment product or strategy. Investing involves risk, including the potential loss of principal. Individual circumstances vary, and any investment approach should be evaluated based on the investor's objectives, circumstances and applicable disclosures. Advisory services are offered through Holistic Finance LLC an SEC Investment Advisor. Holistic Finance LLC is not affiliated with or endorsed by the Social Security Administration or any government agency.

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