If you compiled a list of all the issues ESG investors are concerned about today, this topic would barely breach the ranks of the top 100. But the Federal Trade Commission’s (FTC) recent push to ban noncompete agreements has widespread and meaningful implications—especially for investors who are interested in promoting diversity, equity and inclusion (DEI) among rank-and-file workers.
The FTC just finished gathering public comments on the proposed rule, calling noncompete agreements a form of unfair competition and “a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.”
Noncompete agreements prevent workers from pursuing job opportunities at rival firms or starting their own competing businesses. Eliminating them could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans, according to the FTC.
A large group of institutional investors and foundations, representing a total of more than $400 billion in assets under management, signed a letter in support of the proposal. The effort was spearheaded by the Interfaith Center on Corporate Responsibility and Zevin Asset Management, led by the company’s Director of Sustainable Investing, Marcela Pinilla.
“While noncompetes may serve a limited purpose to safeguard trade and other firm specific secrets, we believe that noncompetes are particularly harmful when they impact workers who are least exposed to trade secrets,” she wrote in her letter to the FTC. “A recent Economic Policy Institute (EPI) survey analysis of the national prevalence of noncompetes found that while private sector business employees with high pay or high levels of education are more likely to use noncompetes, they have become increasingly common in work segments with low pay and where workers have limited education credentials.”
Astonishingly, the EPI study found that nearly 30 percent of the businesses where the average wage was less than $13 an hour required all employees to sign noncompete agreements.
“Employees earning at or below this average wage tend to perform duties using little or no advanced technical skills, which inherently does not require handling trade secrets directly,” she wrote. “Noncompetes also inhibit the acquisition of new skills. These restrictions have a long-term, systemic impact that clearly outweigh the risks of this segment of workers having access to proprietary information.”
In her letter to the FTC, Pinilla pointed out that the ban is especially important for essential workers in healthcare, food and agriculture, residential facilities and the services industry, where Black and Hispanic workers are disproportionately represented.
Of course, these concerns are dismissed outright by a long list of powerful and deep-pocketed lobbyists and special interest groups that claim a ban on noncompete agreements would be unconstitutional and is outside the scope of the FTC’s authority. The most outspoken opponents include the National Association of Manufacturers, National Association of Broadcasters, and U.S. Chamber of Commerce, which called the proposed ban “blatantly unlawful.”
Senators from both parties on Capitol Hill have expressed at least some level of support for imposing limitations on noncompete agreements, according to Roll Call.
But the bottom line for ESG investors is that the treatment of employees at all levels should be a top concern, according to Kristin Hull, founder of Nia Impact Capital.
“We’re in a place where innovation is really, really important, and we need each of our companies to be able to recruit, hire and retain top talent,” she told Roll Call in January.
One final note: This blog was inspired directly by researcher, economist and author Denise Hearn, who helped gather signatories for Pinilla’s letter to the FTC and mentioned it on LinkedIn. Her call to action for ESG investors is clearly articulated in the final sentence of that post:
“When investors step up to support fair markets and worker welfare—through policy changes that will affect the livelihoods of millions—it is powerful.”