Reviews and Ratings for Financial adviser Chris Wheatman, Lancaster

ESG investing: Employee pay becomes a key issue with a third of investors willing to divest

Pay is becoming an important topic for investors, research suggests. In fact, 83% of savers said they expect the companies they invest in through their pension to pay the “living wage” and some would be prepared to take action, according to a PensionBee survey.

The Living Wage Foundation advocates for a higher rate of pay that meets everyday needs, dubbed the “living wage”. Currently, this rate is £9.50 an hour across the UK and £10.85 an hour in London. In comparison, the “national living wage” – the minimum wage for workers aged 23 and over as set by the government – is £8.91 an hour across the UK.

Assuming 35-hour working weeks, the gap between the living wage and the national living wage adds up to £1,073.80 each year. For workers in the capital, this would rise to £3,530.80.

The Living Wage Foundation calculates the cost of living each year, using this to generate an hourly rate that workers need to make ends meet. As social issues rise up the agenda for investors, wages are one of the key areas they’re focusing on.

Survey finds a third of investors would divest from companies not paying the living wage

When asking survey respondents how they would respond to a company not paying the living wage, 33% said they’d want to remove these companies from their portfolio.

But is this possible?

A relatively small portion of companies commits to paying the living wage at the moment. Just 7,000 businesses in the UK have committed to paying the living wage to all employees, including those employed through contractors in the UK. Out of the FTSE 100, only 43 companies pay the living wage.

As a result, divesting from companies could present challenges and limit investment opportunities. However, it’s not the only option investors have. While a third would take serious action and divest, over half of investors that would remain invested would want to see positive action from companies:

  • 31% would want companies to commit to paying the living wage in the future.
  • 20% would want to use voting and selling to force change within companies.

In contrast, just 16% of survey respondents said: “If they make money, leave this topic to the government.”

While, for many, the decision to divest or encourage action will be an ethical one, figures suggest there can be a financial reason as well. According to the Living Wage Foundation, businesses committing to the living wage have benefited from:

  • Improved business reputation (86%)
  • Increased motivation and retention rates for employees (75%)
  • Differentiation within their industry (64%)
  • Improved relations between managers and staff (58%).

These aren’t factors that simply have an impact on the people that work for the company; they can have a positive impact on investors too. Higher rates of motivation and a boost to reputation, for example, could help a firm increase profits and, therefore, add value to investors.

ESG investing: Governance moves to the forefront

ESG (environmental, social and governance) investing means considering non-financial factors when deciding how to invest alongside more traditional considerations.

Often, there has been a focus on the environmental side of ESG, such as whether a company contributes to climate change or deforestation. However, the PensionBee survey results suggest that governance – how a company operates – is becoming more important. Among the top priorities for pension holders were issues like poor treatment of the workforce, tax avoidance, excessive executive pay, and lack of diversity and inclusion.

As with the living wage, these issues are ethical ones, but they can also affect your bottom line as an investor.

Companies with good governance practices will usually be more transparent about how they operate and spend money. It can help investors avoid companies involved in questionable practices that could negatively impact profits. Good governance also promotes a long-term outlook.

Volkswagen provides a good example of the impact poor governance can have on investors. In 2015, it came to light that the carmaker intentionally programmed cars to cheat emission tests. The company faced billions of pounds worth of fines. According to Reuters, Volkswagen shares lost up to 37% of their value in the days that followed the scandal, affecting investors, some of whom have pursued legal action.

How can you encourage change in company behaviour?

As mentioned above, divesting from companies that engage in practices you don’t agree with or believe will harm sustainability is one option. Avoiding companies that don’t match your ESG criteria is known as “negative screening”. Another approach is “positive screening”, where you actively invest a portion of your portfolio in companies that match your ESG criteria.

The survey also found that investors want to use their shareholder power to encourage businesses to adopt more ethical practices. To encourage changes, shareholders would need significant power. As a result, it’s an approach more commonly used by institutional investors, like pension funds. That doesn’t mean you can’t engage in this way with investments though. Choosing an ESG pension fund, for example, can support this goal.

Remember, if you want to incorporate ESG factors into your investment strategy, you still need to consider things like your risk profile and investment timeframe. As with any investment, there are no guarantees, and the value of your investments can fall as well as rise.

Please contact us if you’d like to discuss ESG investing and how it can fit into your investment portfolio.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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