8 July 2022

ESG activism has a bright future, but the Sainsbury’s case contains important lessons.

The growth of ESG activism

There’s a growing view that investors can and should use their power as shareholders of the world’s major businesses to influence how those businesses operate for the benefit of society. Whether it’s on the environment, diversity, or treatment of workers in supply chains, investors are increasingly willing to use their powers of engagement and voting to pursue goals that go beyond the traditional objective of financial returns, in a trend that is sometimes called Environmental, Social, and Governance (ESG) activism.

In the UK, ShareAction is perhaps the leading exemplar of this trend. Their stated goal is to harness the power of investment to build a world where the financial system serves our planet and its people. One way in which they do this is to use shareholder resolutions to put pressure on companies on a range of issues, but most prominently climate, workforce, and supply chain issues, through engagement and through tabling shareholder resolutions. In a notable example, last year ShareAction successfully worked with 117 individuals and 15 institutional investors to persuade HSBC to publish and implement a strategy to phase out coal financing as well as a strategy, targets, and reporting that are aligned with the Paris goals for its overall financing activity.

The Sainsbury’s case

This year, ShareAction turned its sights on wages in the UK supermarket sector. ShareAction has long supported and campaigned for Living Wage adoption. The retail sector as a whole is notable for its lack of Living Wage accredited employers, perhaps unsurprising in a low margin sector employing large numbers of low paid staff.

ShareAction chose Sainsbury’s as its initial target and co-filed a resolution demanding that Sainsbury’s become a Living Wage accredited employer, the first such resolution at a UK-listed company.   

The background to the resolution, and my view on its merits, can be found in an earlier blog on the topic so I shan’t revisit it here. Rather to my surprise, my blog provoked a “rebuttal” from ShareAction, which I then responded to.

The AGM was held on Thursday 7th July 2022, where 83.3% of investors voted against the proposal, with only 16.7% supporting. The vote not only failed to pass, but did not meet the 20% level, which the UK Corporate Governance Code and the Investment Association interpret as a significant level of investor opposition to management.

As readers of my earlier blog will know, I felt that most fiduciary asset managers, in the absence of a very clear mandate to pursue social goals at the cost of financial returns, would need to vote against this resolution. But this is not to say that I am against ESG activism in principle.  

Indeed, it is clear that asset owners and their beneficiaries have objectives that extend beyond pure financial returns. They are citizens as well as investors and are increasingly giving voice to the fact that they want their money to be invested in a way that avoids negative harm and creates positive impact in society. This is a healthy trend that shows no immediate sign of abating, particularly in Europe. As such, ESG activism has a bright and important future. But there are lessons to be learned from the Sainsbury’s case

What lessons can be learned? 

Four themes struck me from the Sainsbury’s case.

1. The resolution should not be overly prescriptive

 A resolution that binds the hands of a board in an operational action is extremely unlikely to be successful. Most investors are extremely reluctant to countermand the business judgement of the fiduciaries that they appoint to manage companies. The Sainsbury’s resolution as drafted, by mandating a higher than statutory minimum wage and passing the setting of that minimum to an external party, had no chance of getting widespread support from proxy advisors or big, especially US-headquartered, funds, which include the big index funds.

Experience from the US suggests that a resolution requesting disclosure would be more likely to be successful, for example: to request the Sainsbury’s board to produce a report on the feasibility, costs, and benefits of becoming a Living Wage accredited employer. Such an approach could then be used across the sector in a process of ratcheting pressure and engagement.

ShareAction clearly hoped that the threat of a resolution would cause Sainsbury’s to buckle. But in fact the nature of the resolution gave Sainsbury’s an easy reason to refuse, and there was never any chance of it being passed in the form it was written.

It is worth noting that while the HSBC resolution also appears prescriptive, an important difference is that HSBC had already made a strategic commitment to a net zero goal. The resolution therefore simply required them to be explicit about how and when they were going to go about that.

2. The business case needs to be carefully made

ShareAction majored on the moral case for supporting the resolution, as is clear from the written statements and quotes from co-filers in their announcement of the action. But a business case was also referred to. For example they said that: “There are well-documented business benefits of paying higher wages, including higher staff engagement, higher productivity, reduced turnover and training costs. Research by the MIT Sloan School of Management shows that adopting good employment practices, including base pay rates above minimum wages, can drive increased service quality, productivity and a reduction of costs in the long term.” 

Unfortunately no credible evidence was provided that the business benefits of paying the Living Wage, let alone committing to long-term Living Wage accreditation, would, for Sainsbury’s, outweigh the costs, particularly when required to do it as just one player in a competitive low-margin industry. I have analysed elsewhere the evidence that ShareAction cited in their rebuttal to my initial blog. I show how it is no way supports the business case they were trying to make.

In an industry where every board, whether of a listed, private, or family-owned supermarket, has chosen not to become Living Wage accredited, the onus is on the proposer to prove that there is a financial business case for so doing. Otherwise why are all these companies foregoing the win-win opportunity?

Of course it is open to investors to take a different view of the evidence or to have an investment belief relating to the business value of Living Wages or the systemic risks of inequality. But for many investors, the lack of a demonstrable financial case becomes critical, as I cover next.

3. The nature of investor mandates needs to be taken into account

Ultimately ShareAction’s moral case was more powerful than its business case. But to vote on a moral motivation, when it likely has costs for the company, is a very difficult thing for an asset manager to do consistent with its fiduciary obligations. To so so they would need a very clear mandate from clients that this is a moral issue on which they want to spend their money.

Most mandates are simply not that specific. Indeed engagement and voting policies on Environmental, Social, and Governance issues are normally couched in terms that suggest these issues enhance long-term value and returns or manage risk and so create no expectation that the asset manager will vote on such issues in a way that damages long-term shareholder returns.

This points to an important lesson for ESG activists. The nature and clarity of mandates between asset managers and asset owners and what they say on ESG matters is absolutely crucial, particularly if ESG goals are to be pursued that may conflict with shareholder value creation. The existence of a trade-off between ESG and shareholder value (as opposed to win-win) has largely been denied by all parties. Therefore, most mandates do not deal with what to do in cases where there is a trade-off nor which ESG issues can be pursued regardless of the costs in terms of reduced shareholder returns.

As we pointed out in our work with The Investor Forum, the question of mandate clarity on ESG issues is a very important area of future focus.

An investor could take the view that paying Living Wages represents a broad moral standard that would be accepted as such by all clients regardless of the economic circumstances of the company, and even if not explicitly covered by their mandate. However, this seems a difficult assumption to make in a country where the statutory National Living Wage is set through a relatively mature process that has been continued through Labour, Coalition, and Conservative Governments; and where an independent Low Wage Commission takes into account multi-stakeholder input and the wider interests of the economy when recommending how fast the National Living Wage can rise.

4. The engagement strategy needs to broaden, not narrow, support

Language used by ShareAction did not recognise the possibility that people with shared aims could have different views on the means to achieve them. Instead they described the resolution as a “litmus test for investors’ social commitments amid the cost-of-living crisis”; that “how investors vote will expose their true colours”; that “We expect investors to support this resolution. The country will be watching closely to see how they vote.” My own analysis of the fiduciary issues investors faced was implicitly criticised for considering issues of low pay and inequality to be merely “academic”.

At times the explanations for the resolution strayed into the political: “We have seen the Government increasingly criticised for failure to tackle the cost of living. Many have called for an Employment Bill to tackle low paid and insecure work, but one is yet to materialise.” And “This says a great deal about how thin the UK’s social fabric is stretched just now. Thursday’s vote at Sainsbury’s AGM offers a chance to restore and repair the damage.”

The language could, therefore, have been more inclusive. It is quite possible even for people who agree on the problem to disagree on the nature of the solution. It is quite legitimate to believe that continued encouragement and engagement is better than forcing Living Wage accreditation on one company in a highly competitive low margin sector. Or to believe that a society-wide issue such as inequality is most effectively and fairly dealt with through political process such as the National Living Wage and the benefits system. Or to believe that the existence of a relatively mature National Living Wage system for minimum wages means that there are ESG issues on which investors can more impactfully focus their attention.

However, no dissent was brooked. In this context, the criticism of Schroders seemed unfair. Although Schroders’ Engagement Blueprint does state that they will encourage companies to pay a living wage, it seems that they had been doing exactly that in engagement with Sainsbury’s. I do not read their Blueprint as requiring them to vote in favour of every resolution that mandates a company to be a Living Wage accredited employer regardless of company and industry or economic circumstances.

Evicting Schroders from the Good Work Coalition seems counterproductive. This must make Schroders, an investor who seems genuinely committed to engagement on workforce issues, much less likely to support ShareAction initiatives in future, which will only weaken them. It also seems to create a massive disincentive for any major investor to join the Coalition in future, given the risk they could be treated similarly if they disagree with ShareAction on a specific case.

Ultimately for shareholder resolutions to be successful, they need to gain traction outside a highly motivated but narrow base of support into the broader investor community, which is very diverse in its views.

The future

ESG activism has a bright future and can be a force for good in the world. Developing technology will increasingly enable more direct client engagement and will enable non-financial investor preferences to be reflected in key votes. ShareAction will continue to have an important role to play in democratising investment stewardship.

But success will require broad coalitions of support to be built. Engagement strategies by ESG activists will need to reflect this and find a way to integrate the perspectives of an extremely diverse investor population. This will require careful definition of resolutions and articulation of a clear case for action that reflects the reality of investor mandates. It will also require an approach to engagement that builds alliances, recognising the legitimate diversity of views in the investor community, in a way that avoids the sense of moral absolutism.

Otherwise ESG-activism risks becoming a sideshow, albeit an entertaining one.