The No. 1 ESG issue for Americans isn’t climate change

In the annual ranking of top U.S. companies on ESG metrics conducted by research nonprofit Just Capital, there were some major moves in 2022, both up and down the list. Meta Platforms dropped 691 spots due to concerns about spread of misinformation on Facebook and Instagram’s negative social influence, while Uber Technologies rose 825 places, to No. 41. Both were unusual circumstances, but Uber’s ranking may say more about the most important issue to the American public when it comes to environmental, social and governance issues: treatment of workers.

It is the No. 1 issue, but that’s not revealed in the fact that Uber vaulted into the JUST 100 — it’s because Just Capital took the unusual step of denying Uber the “seal” that the top 100 companies usually get.

The 2022 JUST 100 ranking: The full list of companies

Uber, along with Lyft and DoorDash — though neither made the top 100 overall like Uber — were placed “under review” by the ESG research firm in this year’s rankings because the data does not capture the fact that a significant proportion of their workforce are classified as independent contractors.

The gig worker story is becoming even bigger as the Securities and Exchange Commission under new chair Gary Gensler is considering a human capital disclosure requirement for companies.

The right answer isn’t necessarily that companies need to make all workers staff, a move that Uber has resisted, most notably in its successful effort over a California state ballot measure about reclassifying independent workers. “What we don’t want to do is the knee jerk thing,” Whittaker said. “It’s easy to say this is bad, companies should be making all their workers full-time employees. I know a lot of people think that, but we need to understand how does the public really think about this. Once we saw how highly ranked it was, we saw we need to do more.”

Just Capital knows for sure that workers are the No. 1 ESG issue to the American public because each year it polls the public to create the weightings for its annual ranking, and for 2022’s list, worker issues were weighted at nearly 40%, compared to 10% for climate. A fair, living wage was the No. 1 issue overall. The second-highest weighted area, Communities (20%), is partially a workforce metric because it includes job creation.

Workers being among top issues in public polling has been consistent in recent years, according to Alison Omens, the chief strategy officer at Just Capital, who during the Obama administration was a top adviser for the White House on private sector engagement. “I would say the urgency or intensity has increased,” Omens said. “And people are saying with more specificity, ‘this is very important to me, as a worker, as a parent to a worker, and as a consumer, I really want to make sure companies are thinking about this differently.’ I would say it is more the degree of acuteness than change in priorities,” she added.

Engine No. 1, which recently scored one of the biggest ESG activist investor victories when it won seats on the Exxon Mobil board to press the oil giant to make more substantial progress on climate, said it now will be placing more focus on workforce issues.

Alphabet, No. 1 on the 2022 JUST 100, uses a vast contingent workforce — in 2018, the number of contingent workers at Alphabet surpassed staff employees for the first time and that temporary workforce continues to attract scrutiny. Alphabet employs so many people directly (over 100,000), though, that it still provides enough data even with the split workforce to do well on ESG workforce metrics.

It is among the 11% of Russell 1000 companies reviewed by Just that discloses intersectional demographic data about its U.S. workforce disaggregated by gender, race, ethnicity, and job category. It also performs an annual pay equity analyses by gender, race and ethnicity, and age, and it has a goal to improve representation by doubling the number of Black employees and increasing the share of underrepresented groups in senior positions by 2025.

Uber gets a lot right when it comes to ESG also, according to Just Capital, from measures related to climate change (even with continuing debate over rideshare’s impact on traffic) to data privacy. And Uber has recognized the importance of gig workers to its success, and public relations. The issue of gig workers isn’t a new, but rather a foundational, point of controversy, with multiple battles through the years at multiple levels of government across countries challenging its labor model, and factions within its global network of drivers pursuing worker activism. Uber cited its own ESG disclosures in an email to CNBC, and specific programs for drivers in the U.S., and other overseas efforts, as signs that it is focused on the issue.

Just noted that the Uber board receives stats on the retention and satisfaction of drivers and delivery workers, and in 2020, Uber tied executive compensation to a human capital-related performance indicator based on driver and delivery person satisfaction and retention metrics. But the level of disclosure that ESG researchers would need to make a true comparison to companies which not only disclose worker stats but directly employ the majority of their employees, is there yet. And as the gig economy spreads across industries, including the largest sectors in the U.S., such as hospitality and health care, it will become more important for researchers to understand how these workers are assessed and push companies to disclose more.

Elizabeth Levy, portfolio manager and head of ESG strategy at Trillium Asset Management, which owns Alphabet, said the use of contingent workers in the gig economy is an ESG issue her company is still evaluating.

“We have not found any of those pure gig economy firms, Uber, Lyft or DoorDash, that we are comfortable investing in so far,” Levy said. But Trillium does not have a specific policy yet for this workforce issue. “This huge pool of labor is not included in any metric. We don’t have enough information,” she said.

Uber ranked as the top company in the retail sector in the 2022 Just Capital rankings, which means its workforce as a whole should be compared to other front line retail companies, which are typically lower wage, fewer benefits employers. But as of now, no basic comparisons can be made between Uber and the rest of the retail sector — in which Walmart, Amazon and Target have all increased pay and benefits, such as education assistance.

The pandemic heightened awareness of how insecure gig worker and contractor positions can be. Microsoft announced early in the pandemic it would pay contractors, but work by consulting firm Mercer conducted in March 2020 revealed that about two-thirds of companies employ contractors, and the majority did not provide compensation during the pandemic.

“The first step is just to have a higher level of disclosure on what is happening across the Uber workforce and other gig economy workers,” Omens said.

In the business world, the trend toward relying on contractors is one that has traditionally been assumed to be a good thing, Omens said, research inquiry will be looking to poke holes in that idea in the next few years and prove “how it is not a good thing,” she said. “From a productivity and loyalty perspective, there are plenty of reasons to think of having a stable workforce.”

Investing in workers can have a positive impact on resiliency and productivity, based on research that finds a correlation between financial struggles and mental sharpness, and more major employers have made moves to focus on worker wellness, including but not limited to financial issues like a living wage.

PayPal, which rose in the JUST 100 rankings to No. 6 in 2022, has been focused in recent years on the relationship between worker pay and benefits, and productivity, in recent years. PayPal CFO John Rainey told CNBC via email that employee polling in 2018 revealed that many of its hourly and entry-level workers didn’t feel financially secure and struggled every month to meet their financial obligations. The company developed a metric that calculates a disposable income target for employees, beyond covering the essentials. 

By focusing on the issue and collecting the data, the company has been able to make multiple changes. After the first year of the program, PayPal found that even some salaried employees at higher levels were struggling due to unexpected expenses, such as medical needs. “Or that we didn’t go as far as we needed for some employees in lower levels, like in markets where we have smaller employee populations,” Rainey wrote. 

As of 2021, PayPal estimates it has raised the minimum disposable income for hourly and entry-level U.S. employees to 18%, well above initial estimates which were as low as 4%.

“These investments have a clear and positive impact on turnover, engagement, customer results and capacity to innovate” Rainey wrote. “We learned first-hand from our employees that when they are financially insecure, it’s harder to contribute fully to the workplace and serve our customers.”

“We’re definitely at a place where people are understanding that from the employee or worker perspective they need to get this right,” Omens said. “Leaders are worried about turnover and hiring, and we are hearing B2B and B2C companies listening to workers in a different way and addressing financial wellness and security.”

In the current labor market, with widespread worries about retention and recruitment, and more activism from workers at companies including Starbucks and Amazon, “companies are hyper-aware” of the worker issue, and “that wasn’t true even two years ago,” Omens said.

During the Great Resignation, with a record number of Americans quitting jobs, it is an ill-advised stance for corporate management to stick with low pay and stingy benefits, Levy said, and it is head-in-the-sand to not track the numbers as a starting point. “If you are afraid of your workforce quitting, know how poorly they were paid,” Levy said. “We all saw the number of strikes increasing this fall,” she said, adding that one notable aspect of the current round of worker activism has been strikers focusing on future workforce conditions, including dual classes of workers, not just their own compensation and benefits.

Labor’s share of corporate profits, which had been in decline ever since the 1970s, has begun to climb again.

“The whole relationship between companies and workers is changing,” Whittaker said.

PayPal is among the handful of companies that are part of the Worker Financial Wellness Initiative started by The Good Jobs Institute in conjunction with Just Capital. Chipotle and Verizon (No. 9 on the 2022 JUST 100) are others. But the fact that it remains a small group of companies is indicative of how challenging it is for companies to hold up a mirror to their workers’ wages and financial health.

ESG’s proof ultimately resides in its ability to identify material risks to a business and lead management to focus on reducing the risk on behalf of shareholders and stakeholders. Labor costs are a major factor in operating margins, and at a time of labor inflation and wage increases, it may become more clear which companies were generating profits based on paying less rather than running a more productive business. It’s an issue Wall Street is attuned to in making 2022 stock picks.

For many companies where profit margins continued to go up in recent years as worker pay stayed flat, the market may soon learn that the margins were unsustainable and based on pay practices which were not setting the company up for future outperformance, Levy said. But still she worries that the lack of information from companies remains, at least as of now, by design. While some small firms may not have the reporting systems or resources to track contingent workers, “large companies staying opaque is another thing,” she said. 

More on JUST Capital’s annual ranking of corporations on ESG performance and research methodology.