Does Work from Home vs. Return to Office Matter to Your Portfolio?

Here's how to evaluate the human resources performance of your stock picks.

Kate Lin 26 September, 2023 | 4:39AM
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The impact of the COVID-19 pandemic has gone beyond individual health concerns, to how we live our lives. One of the more evident ways in which this change has been playing out is in how we work: From home or back at the office?

While this question might seem to be one that human resource departments should ponder, the reality is that it also matters to investors. The latest research report 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 a company'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 Matter?

Some critical questions arise: how do we determine what aspects of the 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 materializes.”

“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. 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.”

Uncovering Hidden Financial Risks Through a 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 low, then you get to a point where they might end up needing three jobs to live and then their productivity comes crashing down. That's the problem… The flipside of that is if you keep wages down, the unintended cost of that decision may not be fully captured in the financials and will materialize later,” he says.

“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 very social focus, but it’s also hard for a company to realize their 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 artifact.”

Context, Context, Context

One of the data points Tang looks at for human capital assessment is web-scrapping data from Glassdoor Review.

“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, his monitoring stumbles on an Australian healthcare company which saw an exceptionally high increase in employee departure. He adds that, like analyzing a company’s financial fundamentals, ESG-aware investors should identify structural and cyclical factors to it.

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

With some engagement works, he continues: “The company gave us more information on the quality of their policies when it comes to employee retention and the benefits they have been offering. The company assured us that this was effectively a one-off [event], driven by COVID. It was quite a specific set of circumstances that the company was facing then.”

He adds: “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’ livelihood and human capital management of the investees.  

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About Author

Kate Lin

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

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