On 7 July this year, investors in the UK supermarket Sainsbury’s voted on a resolution co-filed by ShareAction, demanding that the company become a Living Wage accredited employer, the first such resolution at a UK-listed company.
In an unusual move, Schroders, a top five investor in Sainsbury’s, published a rationale for their decision not to support the resolution. They felt it was wrong for investors to bind the hands of the board on wages, when no competitor in the tough low margin supermarket industry would be subject to the same constraints. Kimberley Lewis, head of active ownership at the asset manager, outlined Schroders’ views in an article titled: “Why Sainsbury’s’ AGM is a pivotal moment for ESG.”
‘Unthinking ESG’
Having made the case for why Schroders could not support the proposal, Lewis takes a swipe at the risk of applying ESG factors “in a blanket way and without due consideration, as ’unthinking ESG’…which harms the credibility of sustainable investing”. She says that the resolution “is a test of whether important nuances in these debates can be heard”. To declare my own hand, I agreed with Schroders’ position, as I outlined in an article ahead of the vote.
Other investors generally agreed. At the AGM, 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.
Yet despite this strong level of investor agreement on the merits (or rather not) of the resolution, ShareAction evicted Schroders from the Good Work Coalition, a group of asset owners and asset managers working together to use their influence to improve the quality of work in UK companies.
This reaction reflects a pervasive tone in the debate on ESG issues, which can be absolutist on both sides of the argument. For ESG proponents, it is the unarguable moral duty of investors to use their influence to make the world a better place. For critics, especially in the US, ESG is simply a back-door way for influential elites to impose environmental and social objectives on society, for which they cannot get political support.
Both these positions ignore the truth about ESG which, as is so often the case, sits between the two extremes.
Critics are right that ESG initiatives are not always conveniently a win-win for shareholders. Some just cost money. In real life, there are frequently trade-offs between social goals and even long-term shareholder value, which creates complexity for asset managers. There are countless studies claiming that this or that ESG approach in business or investing adds value for shareholders. Some of these studies stand up to scrutiny—many do not. Those that point this out can get shouted down.
We all want ‘win-win’
This matters, because asset manager mandates generally aren’t specific enough to allow them to act on moral issues that will cost their clients money. Clients can, of course, demand that non-financial preferences are taken into account. But, to date, ESG policies of asset managers are generally couched in terms of “win-win”, not trade-offs.
In the absence of clear guidance, asset managers are limited in the moral calls they can make, especially if their clients have a range of views. Those that want them to make those calls, regardless, ignore the reality of asset managers’ fiduciary duty.
On the other hand, ESG issues are often material to the company concerned or could become so. No responsible board can ignore the potential impact of physical climate risk or tougher climate regulation. Nor can they ignore how shifting consumer and employee attitudes can lead once-normal practice to come to be seen as beyond the pale, with negative implications for the company as a consequence. To claim that ESG and “woke” are synonymous ignores the reality of sustainable business practices.
Particularly in relation to the environment, companies continue to impose significant externalities on society that we need to come to terms with. In the UK, we have acknowledged the urgency of action on emissions through the Climate Change Act. It is reasonable to expect companies and investors to play their part within this broader political framing. But critics are right that when companies move too far ahead of the political consensus in pursuing social or environmental goals, they move into dangerous territory.
This is difficult territory for boards and investors, requiring considered judgement taking into account the many nuances in play. It’s as well we all recognise this, try to find common ground, and avoid black-and-white thinking predicated on the assumption that only we have access to the definitive truth.
Tom Gosling is an executive fellow at London Business School and at the European Corporate Governance Institute