Investor engagement on the issue of living wages has been steadily growing in recent years, but the focus looks set to be supercharged this year as the cost-of-living crisis bites.

Fuelled by high inflation and spiralling energy and food bills, the cost-of-living crisis was recently identified as the biggest short-term global risk by the World Economic Forum’s (WEF) Global Risks Report 2023. 

For Marie Payne, responsible investment officer at Cardano ACTIAM, the issue represents a market-wide systemic risk that is material to investment portfolios. “We believe that access to a real living wage is not a luxury but a fundamental necessity,” she says.   

Echoing her, Jenn-Hui Tan, global head of stewardship and sustainable investing at Fidelity International, tells Responsible Investor that companies have a responsibility to employees when it comes to addressing inflationary pressures.  

This includes remuneration committees, which should consider “fairness and alignment between executives and the broader workforce” when setting pay.  

“From our perspective as an investor, the risks of companies not doing this can range from a loss of key workers, impact on productivity, reputational damage and – in the most serious of cases – loss of their social licence to operate,” Tan says.   

In November, the $813 billion investor wrote to the chairs of 330 companies across the FTSE 350 and other major European indices on the cost-of-living crisis.  

Engagement intensifies 

For Legal & General Investment Management (LGIM) and Federated Hermes, their engagement with companies is a continuation – and intensification – of dialogues they’ve been conducting for several years on living wages. 

Angeli Benham, senior global ESG manager at LGIM, tells RI that the asset manager has reached out to all FTSE 350 companies in the last 12 months, calling on them to pay a real living wage and put their lowest paid employees first. 

“Globally, we are asking all companies to pay the living wage and provide tiered pay rises which provide the greatest support to those who are earning the least.”   

Benham adds that LGIM also wants to see firms “support a culture of long-term resilience” by using all the tools at their disposal, such as increasing pension payments for those on lower incomes and providing financial education for all employees.  

Pushing companies to explain how they are supporting employees, beyond providing a living wage, is something that EOS, the stewardship arm of Federated Hermes, is also engaging with.  

Amy Wilson, EOS’ director and European team lead, tells RI that it is asking companies how they are supporting employees more broadly through the provision of bonuses or in-kind support, such as help with commuting costs. 

EOS might accept a company not paying a living wage, Wilson says, if they are offering an “alternative but equivalently valuable reward package for employees”. 

Wilson adds that its engagement also extends to the treatment of customers: for example, are they looking at how customers can reduce their costs in the short term by offering discounts, subsidies or grants? 

Focusing on key sectors 

UK supermarkets have been a particular focus for LGIM, in part because of their performance during the pandemic.  

 “These companies were less impacted by the pandemic than others and they typically have higher free cashflows, so they are in a position of strength to be able to pay a real living wage to all their employees,” Benham explains.    

LGIM was among the supporters of the living wage proposal at Sainsbury’s, which attracted 17 percent support at the UK giant in July. Schroders was among those to vote against ShareAction’s shareholder proposals, prompting the UK campaign group to ask the UK fund manager to leave its Good Work Coalition.  

EOS’ Wilson said that although it is engaging all sectors to provide a living wage, it expects more action from some sectors. This includes retail, which tends to have large – and not necessarily well-paid – workforces, as well as utilities and energy, where there is a strong customer dimension.   

On action being taken by companies, Fidelity’s Tan says it is a mixed bag.   

“Some companies are doing a lot already and recognise it as a risk; On the other end, there were others who didn’t feel like they need to do or say more on it.”    

CCLA teamed up with the Church Investors Group to send a letter in September to the largest publicly listed employers in the UK about their response to the cost-of-living crisis. 

The UK fund’s better work lead Martin Buttle says that they were “slightly disappointed” with the responses of the sectors that have greater exposure to low paid workers, like retail, hospitality and food production. 

Obstacles to engagement 

Tan notes, however, that the issue is a challenging one for companies.    

“They are being pulled in different directions by different investors,” he tells RI. “If, for example, you look at climate change, although there might be differences in approaches, it’s a lot less ambiguous on what companies should do.”    

For LGIM’s Benham, one of the biggest challenges when engaging with companies has been the lack of disclosure as to whether they are paying employees a living wage across their own operations and their supply chain.   

To try to tackle this, the $1.6 trillion investor has written to ESG data firm Sustainalytics, asking it to try to collate this data and publish it in the company reports they produce. “It’s only by seeing this information that we will be able to take meaningful action on unequal pay, hold companies to account and protect the most financially vulnerable,” she said.    

They have also called on companies to disclose this information by 2025 – “if they don’t then we will vote against the approval of the annual report of accounts”, Benham says.   

All eyes on AGMs 

Wilson predicts that this year will “be a moment” for cost of living at company annual general meetings. 

Cardano ACTIAM’s Payne concurs and believes that investors will express their views through executive pay votes and shareholder proposals related to workers’ rights.  

More and more proposals have been filed on workers rights in recent times, with topics from sick pay provision to freedom of association and worker health and safety popping up with increasing frequency. 

Wilson tells RI that EOS will look at how boards have treated their workers during the crisis, including whether they are a living wage employer. 

She adds that EOS will also consider work treatment in relation to that of executives, an issue particularly interesting this year as “there are incentive schemes that were granted during COVID that will now be vesting.    

“EOS will be looking to make sure that those incentive schemes aren’t disproportionately paying out for executives because they were offered when the share price was lower,” she says.   

Likewise, Tan reveals Fidelity will consider the disparity between executive pay outcomes and the broader workforce experience.  

“Sustainable companies need to make sure that the broader workforce experience is well aligned to that at the executive levels,” he says. “We don’t necessarily want to be very prescriptive on what that looks like, but we think they should go hand in hand.”  

While there is not a direct vote on this issue, Tan tells RI that the most appropriate vote available to investors is the remuneration report. 

Buttle says that CCLA will also be voting against the remuneration plans of any FTSE 350 company that is not Living Wage accredited and will look at incentive plans.