Read this article to understand:
- Why engaging to reform gig economy companies’ business models should matter to investors
- How platform companies’ business models pass the burden of risks and many costs onto workers, and how investors can look beyond the smoke and mirrors
- The choices investors need to make between short-term profits and long-term sustainability, and what they can do to support models that benefit all parties
The term ‘gig’ was coined in 1915 by jazz musicians. However, today’s gig workers encompass independent contractors, consultants, freelancers, temp agency workers, on-call workers, and contract company workers.1
According to recent research, digital platforms are on the rise because they allow both businesses seeking employees and individuals seeking work to connect more easily, reducing friction in the labour market. They also help businesses reduce costs.
Meanwhile, consumers beneﬁt from the increased availability of goods, especially in diﬃcult economic times. This means platforms increase consumption opportunities, stimulating prosperity.2
“The boom in app-based work is also due to the nature of people’s lives now,” says Alex Marshall, president of workers’ union Independent Workers of Great Britain (IWGB). “This idea of being able to work flexibly around picking up the kids, instead of two people in the household having to go out and work full time, works for a lot of people. That was one of the draws for me. But flexibility does not have to come at the cost of workers’ basic rights.”
In 2021, non-profit publication Rest of World and research company Premise surveyed almost 5,000 gig workers across 15 countries to understand how platform work is experienced around the world. They concluded that while it has idiosyncratic features dependent on geography and local culture, gig workers face similar challenges everywhere: insecurity, anxiety, low wages, and high costs.3
Why this matters for investors
The Rest of World research says gig companies can outcompete and potentially replace incumbents because they are not confined by the social and regulatory obligations that slow traditional companies’ growth.4
Rachel Hargreaves, senior project officer at non-profit organisation and responsible investment advocate ShareAction, says there is also more gig work in the economy than investors may realise, notably through subsidiaries.
“For example, e-courier is a subsidiary of Royal Mail but never appears in any of its reporting,” she says. “Investors need to think about where this type of work may take place in all of their investee companies, not just in gig companies.”
As the platform model spreads, however, so too will its social and economic impact. Poor pay and job insecurity lead to rising income inequality which, according to a 2018 report by the Principles for Responsible Investment, “has the potential to negatively impact institutional investors’ portfolios as a whole; increase financial and social-system-level instability; damage output and reduce economic growth, and contribute to the rise of populism, extremism, isolationism and protectionism”.
The report adds this can negatively impact long-term investment performance and destabilise the financial and social systems in which investors operate.5
Key investment risks
Investors also face more direct risks. Tom Powdrill, head of stewardship at corporate governance expert Pensions and Investment Research Consultants (PIRC), sees two sets of reasons investors should care about gig economy developments.
“For an asset manager, it's going to depend on the nature of the mandate from the client,” he says. “Some asset owners want to promote decent work in its own right. But secondly, these issues are absolutely financially material,” he says.
And while some gig companies are starting to offer their workers better terms, if the market or employment law doesn't support them soon, they will be undercut by less scrupulous competitors.
Yet a ShareAction report published in 2020 found businesses that don’t offer secure work are exposed to reputational and regulatory risks, as well as the risk of industrial action, which can impact investors.6
These issues all represent ESG risks in their own right. But investors who don’t consider the human cost of platform work also risk exposing inconsistencies in their ESG approach.
“Some platform companies are being allowed to get away with poor practices with barely a whimper from the investor community,” says Vaidehee Sachdev, people pillar lead and senior impact analyst at Aviva Investors. Powdrill adds that if a fossil-fuel company sought to rewrite environmental law, it would never be tolerated by the responsible investment community.7
Diversity, equity and inclusion, a key engagement issue for investors, is a significant risk in platform work, according to the Rest of World research. “There is a disproportionate representation of black and minority ethnic workers in gig work,” says Hargreaves.
What is happening in the gig economy?
Of course, the gig economy has some definite plus sides for workers, providing more flexibility and a sense of autonomy.
“But it's being completely corrupted to mean workers get no rights and no minimum standards,” says Marshall. “That's what we are very clear about: we are not anti-gig economy, we're not anti-flexible work. We are fighting for flexible work but for it to come with rights.”
One of the ways companies justify what Marshall calls a “casual misclassification of workers” is by constantly reinforcing the message flexibility only favours workers, implying the benefit must come at the expense of stronger rights. “This is the most contested term in this whole industry,” says Durbidge. “Flexibility is very important for gig workers, but companies also need it. They didn't give it to us.”
The model passes on the costs and risks of scaling activities and expanding to new markets onto the workers themselves
In fact, the model passes on the costs and risks of scaling activities and expanding to new markets onto the workers themselves. Workers typically pay for their vehicles, fuel, insurance and mobile data, so scaling up comes at little cost for the companies. And when a company enters a new market, it draws in workers with generous fees. But the more workers sign on, the more difficult it becomes for each to make a living.
Not only does this dynamic allow platform companies to shift risks onto workers, it also enables them to keep those workers at arm’s length, denying them support, safety, job security and the opportunity to discuss management decisions and working conditions.
While many workers stay on the platforms for the flexibility and autonomy they offer, the downsides create unnecessary pressures and precarity.
Hargreaves is seeing progress – for instance with recent European Commission proposals to enhance platform workers’ rights – but believes more can be done.8 Investors have a role to play in advocating for change but, before they can engage with platform companies meaningfully, they need look beyond the headlines.
“There are so many unnecessary elements of the gig economy that need to come out into the open: algorithm management, transparency, the lack of due process, and of course, the other, more understandable rights such as holiday pay and sick pay,” says Durbidge.
What do investors need to look for, and how easy is it to find?
“Companies know any change in the nature of the relationship is a very big deal and, as such, most will usually feel compelled to disclose potential risks relating to it in their filings, because it's financially material to them,” says Powdrill.
However, while disclosures on the general risk to investors are often available, details of where and when that risk is likely to materialise are thin on the ground. With gig employment rights being fought around the world, different pieces of legislation, legal challenges and negotiations between employers and employees are ongoing in many countries.
Companies are not necessarily going to want to advertise where and when risk is likely to materialise
“That's the difficult bit for investors to get on top of, and companies are not necessarily going to want to advertise that information,” says Powdrill. “Finding it out requires resource and specialist knowledge.”
Hargreaves says some red flags investors should look for, in addition to the way companies classify workers, is the frequency of strike action, employee turnover, and if a company’s pay rate is based on tasks completed rather than hours worked, as this makes it difficult to judge whether workers are being paid fairly.
A tried and tested way to get more information is to engage with companies, but IWGB says investors need to push them hard. Hargreaves recommends including social issues in investors’ engagement policies, as well as making strong asks of gig companies, whether on employment status, health and safety or collective bargaining, rather than just asking for disclosures.
Lobbying for better regulation and enforcement can be a powerful way of supporting workers’ rights too, as is challenging platform companies that lobby to erode those rights.