Is “Where Will the Jobs Come From?” an ESG Issue?

Is “Where Will the Jobs Come From?” an ESG Issue?

As ESG practitioners know, labor issues are generally compartmentalized as a component of the “Social” part of things. Traditionally, or as traditionally as anything can really be in the ESG sphere, “Social” has included a number of issues that relate to labor relations and working conditions–the living wage, recognition of the right to unionize, child labor, employee sweatshops, how many of its employees does a company kill annually (and is this number rising or falling?), Social-License-to-Operate–there is a whole range issues here. And these are indeed important, often compelling, issues. Improving labor conditions is an integral part of Sustainable Development Goals. A number of international agreements–the UN Global Compact and the Equator Principles come to mind–embody specific labor concerns and issues. And many of these issues are actively tracked by organizations such as the International Labor Organization. Much of this is just tracking numbers in public documents (as is much of ESG these days, frankly) but still, these issues do matter–especially to employees.

But there are some broader issues at play here. We are in the midst of several transitions above and beyond the “energy transition” we all love to comment on, and are enthusiastic about. For one thing, the great globalization of the past forty years may be de-accelerating. A number of observers, such as Finbar Livesy in From Global to Local, make the point that current trends are actually in the other direction–travel costs often now are a larger part of the equation than labor costs for an increasing number of products. There are a number of reasons for this, of course–labor costs continue to decline, while oil price volatility the past several years renders planning on stable transport costs pretty uncertain. But Livesy is hardly alone in his recent concerns. MIT economists Erik Brynjolfsson and Andrew McAfee, for example in The Second Machine Age, are among a growing number of economists expressing similar concerns.

More importantly, robots and Artificial Intelligence keep making substantial advances. In a trend that parallels the remarkable drop in renewable energy costs over the past several years, we have seen some significant advances in robotics and (finally) AI over this period as well. That S-curve we all remember from some course or other has finally kicked in. And the range of tasks being assumed by AI-driven systems keeps growing. In additional to welding cars on the assembly line, AI systems now routinely offer medical diagnosis, and write stories for the Associated Press.

As a number of observers (like those cited above) have pointed out, this has had implications for employment trends, and these are only likely to get worse. We addressed this issue elsewhere a couple of years ago, and we are no further along in our thinking of how to deal with this issue than we were then. Because it is becoming not just an economic issue–robotics has been one of the major drivers of changes in manufacturing technologies over the past several decades–but a political issue as well. Donald Trump’s campaign, for all its bluster, was targeted at middle America’s economic insecurities–and it worked. Ditto Brexit here in the UK. Both the US and the UK have had their manufacturing base depleted by a number of trends, including offshoring, but technological change is a critical component of this.. The grim economic details have been out there for some time, and are pretty well understood at this point, although they remain generally ignored in political debate until events like Brexit and Trump come along. Keynes wasn’t kidding when he introduced the notion of “technological unemployment,” although it’s clear that this is a concept that predated Keynes by a several centuries.

But in many cases manufacturing is returning to the US and the UK–but with different employment prospects than what manufacturing was a couple of decades ago. Manufacturing firms simply need vastly fewer employees than they used to. Two recent articles from The Financial Times highlight this trend. The first, one we posted about on LinkedIn a couple of weeks ago, discusses the implications for textile manufacturers in the US, for example, of adopting robotics and AI technologies for manufacturing products that are currently manufactured, often in not very attractive conditions, in a variety of emerging markets. It’s a good article, since it attempts to balance the economic gains that would accrue to manufacturers against what emerging markets might lose–an emerging manufacturing base that helps the development of a middle class and its consequent economic stability. The second, more recent, article discusses the implications for auto manufacturers of a massive switch to electronic vehicles–pointing out that for all their virtues, electric cars require less labor than cars with internal combustion engines. It’s a simple matter of fewer moving parts, really.

We tend to work in an industry where analysts like to complain that costs are too high and margins consequently too low–remember the flap last decade when an analyst from Deutsche Bank complained that Costco’s labor costs should be brought down? I haven’t actually heard that refrain for a while, but that doesn’t mean that sort of thinking isn’t still prevalent in the equity research community–or at rating agencies, for that matter. There probably is a substantial community of financial professionals out there who think that robots and AI are blessings if they end up improving margins.

Well, to be contrarian about it, so does child labor, and Asian and Latin American sweatshops. So does not providing employees with basic health care. There is a whole raft of labor-related issues that ESG proponents, rightly, are concerned about. The issue is where does a line get drawn, if at all. If industrial robots are about to displace a large number of minimum-wage workers in the restaurant industry, for example, should this be an ESG issue? For many in this community, the living wage is a critically important issue–ShareAction, for example, has been pushing this campaign for some time. Does this concern need to be extended to the notion of a basic guaranteed income? That’s not clear at this point, but it’s a topic that may require some serious ESG thinking at some point. Many of us who think of ourselves as financial professionals are still resistant to the ideal of Universal Ownership, with the range of responsibilities that entails. At some point, however, this will require further consideration, perhaps–like much else these days–sooner than we think.

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