"Automation is more than replacing people with machines"

Climate change and digitalization leave no sector untouched. Anna Pot, Manager Global Responsible Investment & Governance Netherlands at APG, conducted a study into the consequences for employees. "Employees are especially important for companies to survive these changes. Committed, trained and flexible employees help a company to adapt and innovate."

For twelve years now, Anna Pot has been studying how companies treat their employees, something that is also referred to as human capital management. She spoke to companies about issues such as child labor in the cocoa industry, workers' right to join unions and working safely during the coronavirus pandemic. Her most recent study highlights three major trends - transitions - that have a major impact on employees, namely automation, digitalization and climate change. She makes suggestions for critical questions that investors can present to companies in this respect.

How does climate change affect employees?

"Fossil fuels are slowly but surely making way for renewable energy. Coal mines are closing. Climate change threatens industries that employ huge numbers of people, while it is still unclear exactly how many and where new jobs will be created. According to estimates of the International Labor Organization, there are 24 million, in industries such as clean energy generation, electric vehicle manufacturing and energy efficiency. But it's not just about jobs. The requirements attached to the knowledge and skills of employees are also changing. Under pressure from society and green regulations, companies have to switch to a climate-neutral business model, encouraged by investors such as APG. Innovation is becoming increasingly important. We already see this trend at car manufacturers, who are now switching from combustion engines to green engine technology en-masse."

What's new about the conclusion that automation is costing jobs?

“The conclusions from studies into this issue are not unequivocal. One study predicts a loss of two billion jobs, the other predicts millions of new jobs will be created. Automation is more than replacing people with machines. Automation also creates a need for other skills, for example, because people and machines work together. Toyota has a nice term for this: jidoka, i.e. automation with a human touch. If they want to remain competitive, companies must constantly improve their digital systems. The economy is therefore becoming increasingly knowledge-intensive. Machines are taking over routine tasks and people are being required to innovate and be more creative."

How do companies benefit from treating their employees well?

"Companies going through major changes need the support and knowledge of their employees to make them successful. They recognize that qualified, flexible and committed people are indispensable to be able to continue to innovate and adapt. Companies have identified human capital and innovation as their top priorities for the coming years. They have to think about how they can stimulate the creativity and innovative capacity of employees. In the battle for top talent, companies want to be known as a good employer. This is a crucial condition for wanting to work for a company, especially for the young generation. To be innovative, companies must create the right conditions in which employees can be creative, dare to experiment and make mistakes. Employee engagement is needed to keep them on board and make the transition effective."

Can you name a company that does this well?

"You wouldn't expect it after Dieselgate, but Volkswagen is a front-runner in this area. They have committed to allowing the transition to take place entirely on the basis of natural attrition, i.e. without laying off people. They have extensive programs in which they train employees to make the change. And it's not just about mechanics who have to switch from combustion to electric engines, but also about office workers who learn new things, such as programming or analyzing data. With digital skills, they can make the transition to other departments within the company or even join a different company. Incidentally, we are still in talks with Volkswagen about the aftermath of Dieselgate. We're asking the company to create a more open corporate culture and establish a truly independent supervisory board."

And what if companies don't do this?

"Companies that don't treat their employees well miss out on bringing in top talent, they run the risk of jeopardizing operations, or sustain reputational damage due to abusive labor practices. And it goes beyond that. If we as a society do not deal well with these major shifts, it can cost many people their jobs or significantly affect the quality of their work. This will mainly affect the less educated, poor and vulnerable groups, resulting in an increase in social discontent."

What does APG ask of companies? What does 'treating employees well' mean in specific terms?

"Our minimum requirement is that companies guarantee safe working conditions for their employees. We use the standards of the International Labor Organization. Safe work and healthy labor relations are also taken into account in our sustainability criteria. If necessary, we engage with companies to improve their working conditions. We want to know about the strategies of companies that are in transition. We ask them for a skill gap analysis: what skills do your employees have now and which ones are still lacking? And how do you get from A to B? Are you going to fire people and hire new ones? Are you solving it through natural attrition, or are you training your current employees? A year and a half ago, we asked the automotive industry to conduct such an analysis. At that time, hardly anyone did it and now, almost all car manufacturers are working on it. Ford has already included the analysis in its annual report."

In addition, APG sets requirements for company training programs, says Pot. "We want companies to report on those programs and show their impact. Employees must be included in the transition of the company. Clear communication, training and the adoption of new expertise are key elements in that respect."

You have years of experience in the field of employment rights. What was the biggest eye-opener for you during this study?

"We've always paid attention to the social component of sustainability, but this aspect has really taken off since the corona pandemic and the emergence of transitions. Especially the companies themselves now see the importance of it."

What will you do with the results of the study?

"Companies with good human capital management are attractive to us as an investor. Studies show that investors who invest in these types of companies perform better on average. We therefore discuss our findings with our portfolio managers and how they can use them in their investments. Our paper contains specific suggestions for questions they can ask companies in transition. It's a pretty long list. If you only have five minutes, I'd ask three. First: what is your strategy for human capital management? Second, how does it fit into the company's long-term strategy? For example, is it a driver of innovation, or customer satisfaction? And third: how do you measure progress as a board? These three questions give a pretty good idea of how seriously a company takes human capital management."