Much of the attention on ESG currently focuses on risks linked to climate change, but what about social risks? The incorrect management of equality, business ethics, working conditions etc can have a great impact on the company's performance.
The global pandemic has put mental health high on the agenda and, with World Mental Health Day on October 10th, investors should be asking themselves, is mental health financially relevant?
According to the World Health Organization (WHO), yes, it is. Depression and anxiety in particular cost the global economy some $1trn per year, due to the loss in productivity. Overload, poor planning and organisation of tasks, or more extreme situations such as harassment or physical or verbal abuse in the work environment are some of the factors that can impact a worker's mental health. Ultimately, the deterioration of the working environment and the mental health of the workforce leads to losses associated with absenteeism, but the impact can be felt much earlier on employee productivity.
The COVID crisis has only exacerbated the problem. Social isolation, drastic changes in lifestyle and unemployment (even temporary) have increased the likelihood of suffering from anxiety or depression. At the same time, according to the latest survey conducted by the WHO, the pandemic disrupted or halted critical mental health services in 93% of countries worldwide, while demand for such services was increasing.
Given the magnitude of the problem, proper management of mental health should be among the social risks that are monitored in the workplace. While the level of risk is not easily quantifiable, there are a number of aspects that can be considered within the analysis. Does the company monitor employee happiness and satisfaction? What is the reported absenteeism rate? Do company policies prioritise employee wellbeing? And are there internal support mechanisms for people with mental health crises?
Considering these and other factors, some businesses are having a better impact than others in managing the current mental health crisis. For example, data from US-based data and investment specialist Ethos ESG, indicates that only 12% of S&P Global companies have a “very positive” or an ‘A’ rating on mental health impact (on an A-F scale). Approximately 60% have a ‘C’ rating or below.
According to the WHO, for every dollar put into scaled up treatment for common mental disorders, there is a return of $5 through improved health and productivity
On the other side of the ocean, the results are slightly better. 18% of companies in the Euronext 100 index receive an ‘A’ rating, and 65% of the index is above average, suggesting that large European companies are better at managing employee mental health than their American counterparts.
Again, using data from Ethos ESG, there are some notable differences in mental health impact by sector. Healthcare has the highest average score (75 out of 100, or ‘B’), followed by Utilities (67) and Technology & Communications (60). In contrast, the sectors with the lowest average mental health impact are Energy and Food & Beverages (both 38).
Fortunately, where there is risk there is also opportunity. According to the WHO, for every dollar put into scaled up treatment for common mental disorders, there is a return of $5 through improved health and productivity. What is the investor's place in all of this? Those seeking to go beyond ESG risk management, who desire a high SROI from their investments, can align a portion of their portfolio with assets that are contributing to the development of positive mental health services and programmes.
Returning to corporate metrics, according to Ethos ESG’s Business model contribution to mental health indicator, there are several hundred public companies with a score of 80 out of 100 or better. These are companies that are contributing to the creation of products and services with a high positive impact on mental health. Many are in the Healthcare sector and are actively treating patients for mental health disorders or creating mental health-related products. Others outside of Healthcare stand out for their commitment to work-life balance, employee benefits and wellbeing, and positive employee reviews for their experience at the company.
Other ways that companies can promote mental health are many: financial products offered to vulnerable groups, training programmes for senior management, private care services, etc. As shareholders, there is also much that can be done to promote a healthy working environment and prevent risks associated with poor mental health management. The committed shareholder may require improvements in flexibility and work-life balance policies. The creation of a committee representing employees, or, if such a committee already exists, facilitating direct communication channels with employees about their working conditions, can be another measure to help prevent negative impacts on employee productivity.
In conclusion, mental health is financially relevant and a key factor to assess social risks, as poor management on this issue can have a significant impact on a company's productivity. Investors who want to protect their portfolio can evaluate the quantitative and qualitative aspects mentioned in this article, and for those looking to generate a positive impact in addition to the financial return, they should certainly consider this cause among their investment criteria.
Alberto Monzonis is an independent advisor expert in the inclusion and development of ESG aspects in corporate strategy