Q&A: why might worker safety be a driver of positive returns?

Our research into why ESG factors might increase returns led us to focus on worker health and safety as an indicator.

Why focus on worker safety?

There is no quarter of a century history of finance literature relating to this topic, nor is it central to the deliberations of governments around the globe. It does not even tend to figure very prominently in reports on firm ESG characteristics.

But despite this inattention, worker safety is an enormously important issue.

Nearly 2.8 million workers die each year as a result of their work, according to the International Labour Organization, a United Nations agency which aims to advance social and economic justice through setting international labour standards.

The overwhelming majority of work-related fatalities are from sickness, with around 350,000 fatalities per annum from injuries.

The agency found there are also a further 374 million serious non-fatal work-related injuries each year, defined as those resulting in more than four days’ absence from work.

So how does worker safety relate to performance?

The chart below shows the performance of an investment strategy using our measure of worker safety, which weights together fatalities and injuries.

Cumulative performance 


The performance is remarkably consistent over time, so it is surprising that there has been so little attention to worker safety as a signal of corporate performance.

We believe predictable sources of excess returns must come from either systemic risk or from an informational advantage over other investors.

It seems obvious that worker safety belongs to the latter category.

Why might companies that are safe for workers be “safer” investments?

It is hard to think of reasons why companies that do a particularly good job of providing a safe working environment would justify a risk premium. 

If anything, as might be expected, companies that are safe for their workers are also somewhat “safer” – in the sense of less volatile – for their investors. Over the past decade, a portfolio of the top 25% of “safest” companies for workers had a volatility of 15.9%, while the bottom 25% had volatility of 17.3%.

We prefer the hypothesis that returns to this signal are the result of investor inattention. It is easy to imagine why investors (and academics) may not pay attention to these signals. For one thing, very few investors have ever experienced at first-hand a workplace where worker safety is actually a material concern, and so it may simply not occur to them to be interested in worker safety as either an ESG concern or a return driver.

A deeper reason may be that the direct cost to firms of worker safety may seem too small to have a significant effect on firm financial performance.

Schroders’ proprietary measure of sustainability, SustainEx, suggests that total costs per annum of worker safety are less than five basis points of total market cap. By contrast, it is easy to see – including for investors – how a successful R&D project could materially drive future firm revenues.

So why might worker safety be a driver of positive returns over and above those to be expected from reduced costs? There are several mechanisms which could be at play:

The most obvious mechanism in the world’s largest stock market, the US, is through the effect of poor worker safety on health insurance costs (whether or not the employer self-insures).

However, the way in which companies achieve superior health and safety is probably more important. High-performance work systems rely on empowering employees and devolving decision-making, and focus on developing committed and skilled workers.

While many companies describe their management approach using language like this, in dangerous industries worker safety is a tangible measure of their success.

As the chart below shows, firms that provide safer workplaces (each bar represents a higher quantile of safety, neutralised by industry) generally also show faster revenue growth over the preceding three years.