However, wages are not the only issue.

Market participants should consider to what extent macro factors affect the likelihood of labour activity, and how much is down to how the company operates and treats its workforce. After all, labour relations are a material ESG factor for companies and investors alike; strike action causes disruption to output and can negatively impact a company’s reputation. Even past activity can re-emerge as a problem, as RyanAir found out this year when a court ordered the carrier to compensate passengers affected by staff walkouts in 2018.

Events at companies such as Amazon over the years demonstrate workers’ inability to affect their employment conditions. But this month a New York Amazon depot finally secured union rights after fierce opposition. Amid wage disputes, other labour rights issues are coming to the fore, suggesting strike action is about more than money.

Increased labour tensions come at a time of changing regulations. A greater focus on ESG incentivises investors to explore labour rights at their companies and get ahead of the curve.

A moment in time

Since Q4 21 worker dissent has arisen in various countries over real-wage disputes. Various high-yield names such as Tesco, Eskom Verallia and Valeo Foods were at odds with unions who claimed that existing or suggested pay rises failed to beat inflation, with strikes confirmed at the latter two and narrowly avoided in the case of Tesco.

Despite offering generous benefits to employees and ranking highly in surveys, King Soopers’ workers staged high-profile strikes as wages failed to keep up with living costs. Companies may argue their inability to increase wages in line with inflation doesn’t make them bad employers overnight. With prices accelerating and pay rises typically set just once per year, in many cases salaries are being simply outrun by inflation.

Inflation panic combined with skills shortages has boosted worker bargaining power. US companies in some sectors have even offered hiring bonuses just to incentivise applicants. In the UK, spiralling wages are anticipated for manufacturing and professional jobs alike, with the new Unite Union boss declaring a strategy of demanding inflation-adjusted wages using the skills shortage as negotiating leverage.

There may be more behind the recent strike activity than meets the eye. A UK trade union, Prospect, stated that rising living costs are “throwing fuel” on a mix of labour-rights grievances that have built up since before and during the pandemic. At Tesco for example, the significant contribution of workers to company output during the Covid-19 pandemic and a very profitable year was cited by unions in their negotiations. The union involved in strike action at Verallia mentioned redundancy plans resulting from a restructuring.

It is tempting to conclude most strike action is driven by employees struggling to make ends meet. Whilst inflation may indeed be a contributing factor, there could be other significant reasons to strike for a better deal. In March, workers at Orpea, the French care provider, struck over labour conditions and the profit-driven erosion of client care; the public prosecutor is now investigating press allegations which caused Orpea’s bonds to dive. Conforama workers also struck over a mix of wage and working condition concerns, while in February Heathrow Airport-based catering firm DO&CO narrowly avoided a strike which cited low industry-comparable wages alongside unionisation and pensions disputes.

Inflation may be a recent phenomenon, but wage stagnation is not new. In the UK real wages have hardly progressed over the last decade. The US has experienced multiple decades wherein productivity gains went to top earners leaving low and middle-income groups worse off. It is not surprising that workers are pushing to defend their wages and economic position, especially when their services during the pandemic were so publicly relied upon.

This has led to political pressure on Governments to increase minimum wages. This year, for example, the French minimum wage rose 0.9%, and the highest UK minimum wage figure rose by 9.8% but remains lower than the national living wage. The US federal minimum wage of $7.25 has not kept up with living costs, and $15 per hour is often cited as a benchmark. Following a number of employee strikes on the matter and a target ‘FightFor15’ campaign, 11 states have passed legislation in 2022 for a $15 dollar state-wide minimum wage often to begin in 2024 or later, and some have introduced consumer price indexed wages. However 20 states still use the federal minimum wage, and 7 have a sub-$15 state-wide minimum wage.

Taking the initiative: regulations and investor standards

Not only are labour relations a material ESG concern in their own right, incoming regulation may force the hand of companies to perform better. Despite being slow to make changes, President Biden in the US has a clear pro-union position that will likely give workers more leverage over companies. If the balance does shift in favour of unions, companies with poor labour relations could face more scrutiny and direct action.

The EU has introduced a landmark proposal that will force gig-platform companies to treat their workers more like traditional employees. This will remove the accountability of the exploitative casual-work model that has been so crucial to the large profits made by the gig-economy industry over the last decade. Legislative activity in the UK will introduce new statutory rights that may disrupt companies with less worker-friendly business-models. There do remain gaps in legislative frameworks however. Opposition by ministers defeated a bill in the UK which would have prevented fire-and-rehire tactics used by companies like British Gas last year.

Investors may see legislative signals as a prompt to start early on engagement or the use of other ESG investing tools to mitigate the risks of poor labour rights. Recent and potential developments demonstrate the intent of governments on labour rights, and include:

US

• ❌ Attempted legislation: Protecting the Right to Organise (PRO) Act to penalise firms that violate workers rights, and the Build Back Better bill with bolstered employment laws, both failed to pass the US Senate process
  
• ❌ Attempted provisions: A fifteen dollar minimum wage in the American Rescue Plan eventually did not make the cut, but shows intent
  
• 📋 An executive order to create the ‘Task Force of Worker Organising and Empowerment’ whose report supports the goals of the PRO Act of enforcing rules of employer persuasion regarding worker organising, reducing federal funding for anti-labour firms and developing around 70 pro-labour policy recommendations
  

EU

• 🚕 A proposal by the European Commission will require gig-platform companies to supply proof that they do not employ workers, otherwise sick pay, holiday allowance, retirement benefits and minimum wages could be enforced for their workers.
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UK

• ⌛️The Employment (Caring Leave) Bill is currently on its second Commons reading and will allow carers on an unpaid basis to take related leave from day one of employment
  
• 🛡Legislation to protect employees from sexual harassment was proposed in 2021. The laws place a duty on employers to provide a safe space, including from harassment by customers, and potentially increasing the time for Equality Act 2010-based claims
• 🛋️ The right to request flexible working has been proposed in a future Employment Bill in 2022
  
• ⌛️The stalled Employment Bill, proposed in 2019, could affect gig economy business models by granting employees with more than 26 weeks service the right to request predictable work contracts and reasonable notice if their shifts are cancelled at short notice
  

If incoming laws are not enough, investors have other incentives to look into labour rights. Investors and companies are increasingly signing up to international initiatives to confirm their social licence-to-operate, or actively being pressured to do so by their customers and other stakeholders. If a financial institution supports an initiative and benefits from the publicity, it can equally be held to account by discerning stakeholders. At the same time, investor disclosure requirements are slowly tightening with introduction of legislation-backed reporting.

• The United Nations (UN) Global Compact (UNGC) and the OECD Guidelines for Multinational Companies both include the right to collective bargaining as one of their principles. The new EU sustainable finance regulations require investors to disclose violations of these initiatives at portfolio companies
  
• The UN Sustainable Development Goals also features its own target to “Protect labour rights and promote safe and secure working environments for all workers”
  
• Additionally, the respected reporting framework, the Global Reporting Initiative (GRI) includes the right to association and collective bargaining as its own section for disclosure
  

Labour rights risk at High Yield names

From an ESG perspective, the state of employee relations risks exposure to damaging labour activism. The high-yield universe has shown instances where management appear disjointed from their employees:

• The CEO of cruise line operator Carnival received a pay rise despite company losses after its ships were idled due to Covid-19 restrictions, and the Co-op paid executive bonuses while retaining £65m of government Covid relief funding
  
• ASDA’s 150,000 workers had to accept ‘below average’ pay after a strike was averted
  
• Playtech shareholders rejected its 2020 CEO bonus package for a fourth year in a row, while staff were asked to take pay cuts
  
• Softbank Vision Fund saw a doubling of CEO compensation
  
• Labour rights concerns at WizzAir caused a major investor to exit
  
• Matalan was called-out for not paying the minimum wage by the government and forced to re-pay staff and could face additional fines
  
• Ocado delivery drivers voted to strike after facing dismissal threats because they divulged poor wage and work conditions
  

Good performers in the high yield market

Some companies have recognised the benefits of maintaining a positive workforce environment, these include:

• Retailer M&S increased the minimum pay for workers this year, and added benefits including health checks to employment packages to ‘improve colleague wellbeing’
  
• Employees of Stellantis (a joint-venture with Fiat Chrysler) benefited from a profit-sharing compensation model after strong FY2021 earnings
  
• In 2020 the Eramet CEO refused a pay rise in order to contribute to a Covid-19 solidarity fund
  
• Similar to the above, the CEO and CFO of William Hill did not take their pay rises in 2020 due to the pandemic
  

Companies may not have a say on macroeconomic events, but they can control their response. Although the pick-up in strike action in the last six months was primarily driven by surging inflation, labour shortages and previously un-remedied working condition grievances were also a factor. Some strikes took place solely seeking labour rights improvement.

Positive employee relations could be a buffer between order and chaos during the current macroeconomic difficulties, set to continue for at least a year. Companies with positive employee relationships who are then viewed in this light publicly will likely benefit from dialogue rather than distress, and be ahead of the game when fresh regulations are introduced.