This year is turning into an unexpectedly testing time for responsible investment. People could be forgiven for feeling nostalgic about 2021, when the ESG tide seemed unstoppable. This year, challenges are emerging from multiple directions. This isn’t all bad. It’s when the tide goes out that everyone gets to see who has their responsible investment trunks on – and who is floundering about awkwardly without them.
One challenge is a vigorous assault on all things ESG from emboldened opponents of so-called “woke capitalism”. Republican Party fiduciaries with responsibility for US public sector pension assets have threatened to withdraw mandates from asset managers taking firm action in support of the energy transition.
The response? Rather than standing up to this politically motivated coercion for the sake of clients and beneficiaries across the world, several asset managers – most visibly Blackrock – have signalled a retreat from robust stewardship of corporate climate laggards. We won’t know exactly what’s been happening until 2022 proxy voting records are published and compared later in the year, but the signs aren’t encouraging.
A second challenge comes from financial regulators who, sensibly, have begun to focus in earnest on greenwash. It will be fascinating to see how asset managers respond to this new supervisory expectation that they deliver substantively on ESG marketing claims. It seems at least possible that some firms may hastily if quietly retreat from ESG commitments made in headier days. Let’s hope the more common response will be to strengthen responsible investment processes so as to copper bottom claims made to retail and institutional investors, both in marketing materials and in client updates on ESG performance.
Arguably the greatest test for responsible investment emerges from the rigours of this year’s bear market, which will reveal if the concept is truly for all seasons or only attractive to certain investors when markets keep bobbing upwards.
Of course, these aren’t just testing times for owners of capital assets and those who invest for them professionally. Out there in the real economy, 2022 is genuinely painful for low-paid people whose earnings growth falls well short of a surging inflation rate.
Indeed, the cost-of-living crisis provides another novel test for responsible investors. Since the PRI’s six principles were first launched more than 15 years ago, inflation has been a non-issue in most developed economies. We’re in a different world now. And since it doesn’t look as though inflation will be a short-lived phenomenon, responsible investors will need to figure out a systematic response to this new dynamic – one that balances risk, return and impact.
Investor action on climate change can be a source of inspiration here. On climate, investor credibility depends on a link through to the science. The IPCC’s reports, and the expertise of its authors, are a necessary underpin for investors’ climate targets and transition plans, as well as the demands made by investors of high-carbon companies whose strategies and capital expenditure plans will, unless radically revised, take the world well beyond 1.5C degrees of global heating.
A powerful equivalent to this exists for the S of ESG. Social scientists in the UK have undertaken research and analysis on Minimum Income Standards for several decades, calculating the income required to achieve a “minimum acceptable standard of living” in the UK. The methodology underpins the wage calculations undertaken by the Resolution Foundation annually for the Living Wage Foundation.
More than 10,000 firms have accredited as UK Living Wage employers since 2003, including more than half of the FTSE 100. These employers acknowledge a social responsibility not to let their workforce fall below the wage threshold required to achieve that minimum acceptable standard of living. The motivation is more than altruistic – poverty pay not only harms affected workers but also slows economic growth and stokes instability.
Investors have played a decisive role in promoting Living Wage standards across the UK’s listed sector over the last decade. This always made sense – but now in an inflationary environment that imposes extreme pressure on low-income families, holding firm in support of Living Wages looks set to become a far more significant, visible mark of investor responsibility.
In two weeks, on 7 July, at the AGM of Sainsbury’s plc, the UK’s second-biggest supermarket chain, investors will vote on the UK’s first Living Wage shareholder resolution. Backing the resolution is NEST, the UK’s most populous pension scheme, with more than 10 million members. NEST pension savers are typically modest earners – a good number of them have direct experience of surviving on less than a living wage. Also backing the resolution is LGIM, the UK’s largest asset manager, as well as Fidelity International, HSBC Asset Management and a range of others.
Sainsbury’s directors have recommended investors vote against the resolution. So a classic proxy battle is underway. Many big beasts in the UK’s responsible investment landscape are, so far, keeping quiet on how they will vote, including Schroders and Aviva Investors. There can be no doubt this vote throws up a highly significant choice for investors. We will all learn a lot when it emerges who has voted in support and who against.
We are just halfway through 2022, but already this year, the context for responsible investment practice feels distinctly different and a good deal more exposing than for some years gone. Uncomfortably, there are fewer easy options now and more hard choices for investors signed up to responsible investment principles. Win-wins look thin on the ground in 2022. Well, so be it. This year we’re starting to see who is for real.