Companies’ response to the cost-of-living crisis is a strong indicator of their broader social-related performance.
As the cost-of-living crisis rages on, with inflation spiking and bills skyrocketing, ESG-focused investors expect responsibly run companies to support their employees and pay fair, equal wages to avoid exacerbating wider social and workforce-related risks.
The cost-of-living crisis is “impacting workers’ stress and mental health, […] pushing them to breaking point and industrial action”, says Charlotte Lush, Senior Research Manager for the Workforce Disclosure Initiative (WDI) at UK NGO ShareAction.
Independent think tank the Resolution Foundation, which is working to improve living standards for low- and middle-income families in the UK, said that income inequality will continue to rise year-on-year, reaching highs of 40.8% by 2027-28, with the bottom 10% of the country’s population facing a higher inflation rate in terms of income compared to the richest 10%.
“Workers may be less productive when they are at work because of the physical and mental toll of the cost-of-living crisis, and they may also take more time off as a result of sick leave or stress,” Lush adds.
“More broadly, companies that aren’t taking sufficient action to support staff will lose the good will of both the public and their workforce. This can compromise reputations as well as potentially [causing] issues with employee satisfaction, recruitment and retention.”
A recent survey of over 1,000 full-time employees across the UK found that 62% would quit their job if their employer doesn’t offer support during the crisis.
From an investor’s perspective, the material impact of the cost-of-living crisis can be viewed at two different levels, according to Remi Fernandez, Specialist on Human Rights and Social Issues at the UN-convened Principles for Responsible Investment (PRI).
“At a portfolio level, it can lead to overall decreased productivity, which in turn impacts long-term corporate performance,” he says. “At a system level, disparities in income lead to increased financial and system-level instability.”
The UN Development Programme estimated that soaring food and energy prices sent 71 million people in developing countries into poverty last year.
Investors are concerned that the cost-of-living crisis is “directly impacting the social issues [investors] care about”, says Sophie Johnson, Head of Governance and Voting at Royal London Asset Management (RLAM).
“It has highlighted socioeconomic disparities and gender inequality, as well as the stagnation of wages for many workers,” she says. “Companies are differentiating themselves by how they respond to the crisis, notably in the help they do (or don’t) provide their workforce.”
Yet many companies are failing to provide data on their management of the cost-of-living crisis, according to the sixth annual survey of 200 global companies’ workforce disclosures, published by ShareAction’s WDI. The WDI’s signatory group is formed of 63 financial institutions with over US$10 trillion in AuM.
Fifty-eight percent of assessed companies didn’t provide any data on the percentage of employees whose basic salary is equal to the legal minimum wage, the report said. Further, 43% of companies didn’t disclose how they are working to improve wage levels for non-employee direct operations workers.
In many organisations, wages are “too low to adequately protect workers from the most serious impacts of the crisis”, the report warned, noting that 30% of companies are failing to pay a living wage in at least one operating location – or simply don’t say if they do.
US proxy advisor Glass Lewis recently recommended that shareholders vote against Barclays’ pay proposals for its top executives, which total a combined £1 million.
However, investors must call for disclosures on the difference in overall pay between executives and the rest of the workforce, says Tom Powdrill, Head of Stewardship at the Pensions and Investment Research Consultants (PIRC).
“At a high level, companies have to make trade-off decisions: how much can or should be awarded to executives, or distributed to shareholders, versus spent on improved wages or maintaining prices at a more affordable level?” Powdrill asks.
Corporate disclosures on this are also inconsistent. The WDI report noted that 71% of companies based in developed markets provided their median CEO-to-worker pay ratio compared to 33% of companies based in developing markets.
“A number of investor initiatives and statements have sought to encourage both restraint in executive pay and provision of extra help for low-paid workers,” Powdrill says.
The UK’s Pensions and Lifetime Savings Association’s (PLSA) 2023 voting guidance called on companies to “exercise restraint in executive pay, especially during the cost-of-living crisis”, recommending that remuneration structures and incentives for executive directors should “cascade down” to allow all employees to “share in the success of the business”.
Faith Ward, Chief Responsible Investment Officer at UK-based Brunel Pension Partnership, confirmed with ESG Investor that a coalition of asset owners, of which Brunel is a member, are currently collaborating to address issues around executive pay.
The asset owners plan to address factors they “increasingly believe boards should be considering when taking the cost-of-living crisis into account, as well as the impact on the wider workforce of their decision-making”, according to Ward.
Widening the gender divide
The WDI report also noted that the cost-of-living crisis is having a disproportionate impact on women.
Forty-seven percent of assessed companies failed to provide any information on the proportion of women in the bottom pay quartile. On average, these companies had more than twice the proportion of male workers (65%) in the upper pay quartile than female workers (30%), it added.
The average gender pay gap also increased by 7% in 2022 compared to the year before, reaching 24%, WDI said.
“The significant increase in pay gap was very disappointing and not what we were expecting to see,” admits WDI’s Lush, noting that there has previously been a “slow but consistent trend toward lower pay gaps” disclosed by assessed companies.
The Gender Pay Gap Service website has also noted that the average wage difference in the UK between men and women doing the same job is currently sitting around 9.4%, with banking and finance remaining among the worst offenders with an average pay difference of 22.1%.
This gender pay divide is also identified in research published by the Work Foundation at Lancaster University, which said women are 1.8 times more likely to be in insecure work than men.
Additional research conducted by Legal & General found that working women are “significantly closer to the breadline” (14 days) if they lose their source of income compared to men (28 days). Further, working women are more likely to be in part-time employment compared to men (31% versus 11%), due to expectations around domestic and caring responsibilities.
Rules of engagement
Investors are “taking note” of findings such as those highlighted in the WDI report, warns Johnson from RLAM.
As seen with the shareholder proposal filed against UK supermarket chain Sainsbury’s last year, they are increasingly willing to engage with companies and table shareholder proposals to improve cost-of-living focused disclosures and performance.
“Engagement on the cost-of-living crisis is important as it enables a better understanding of how companies, issuers and assets are managing sustainability-related risks and opportunities, and how to consider these in the context of an investment,” says Katie Frame, Active Ownership Manager, ESG, at Schroders.
Aviva Investors’ 2023 annual letter to the board chairs of investee companies identified the cost-of-living crisis as one of the investment firm’s three engagement priorities in 2023, alongside the energy transition and biodiversity.
Concerned that the 100 largest-listed employers in the UK were not doing enough to protect employees, asset manager CCLA Investment Management coordinated an investor statement – signed by the likes of Federated Hermes, Brunel and EdenTree Investment Management – which outlined their list of expectations. These included a commitment to publicly disclose how they intend to support workers and consumers in line with the crisis, providing an update on progress every six months.
PRI’s Fernandez notes that focusing on living wage is “a good starting point” for any investor looking to do more to address the cost-of-living crisis. He points to groups like the Platform for Living Wage Financials, an investor initiative engaging on living wage across fashion, food and agriculture, and retail sectors.
UK auto-enrolment workplace pension scheme Nest has signed onto an investor statement as part of ShareAction’s Good Work Coalition. It asks companies to provide secure work, become an accredited Living Wage Employer, and offer the lowest paid workers pay rises in line with the current rate of inflation.
“Nest will be having meetings directly with a number of companies over the course of the year to have discussions surrounding implementing the real Living Wage,” says Tom Sanders, ESG Analyst at Nest. The Living Wage Foundation engages with businesses and other stakeholders to ensure companies pay a real living wage based on the real cost of living, as opposed to the government minimum.
Sanders also points to the pension’s 2023 voting and engagement policy, within which Nest outlined its intentions to vote against investee companies’ remuneration reports if annual increases in executive salaries are higher proportionally than general pay increases across the broader workforce.
Johnson says that best practice for a company managing the cost-of-living crisis will of course vary according to the industry and nature of the company. However, there are some common themes RLAM considers in its engagements with portfolio companies, such as fair pay, implementing initiatives to provide mental health and financial planning support, and whether companies have diversity and inclusion (D&I) initiatives in place.
“If a company is not in line with best practices, RLAM may take actions such as engaging to encourage change, reflecting our concerns through voting, or ultimately deciding to reduce our position or even divesting from the company,” she tells ESG Investor.
Investor engagement on the cost-of-living crisis can have a “powerful impact” on driving forward better standards, says Lush.
“Companies that have clear mechanisms in place to understand and act upon worker feedback are much more likely to have a successful response to the crisis than those that don’t,” she says.