How can we tackle living wages? Episode four


This is a transcript of a discussion about living wages between Schroders’ Angus Bauer and Caroline Rees, President and CEO of Shift, a non-profit in New York focused on business and human rights that works with companies, governments and their stakeholders to help put the UN Guiding Principles on Business and Human Rights into practice.

  • You can listen to the full conversation by clicking on the play button at the top of the page.

Angus Bauer:

Hi there, my name is Angus Bauer, and I am the Head of Sustainable Investment Research at Schroders. We have a thematic research team, and I am responsible for the research stream on human capital.

This is the fourth in a series of podcasts that we are recording with guests from a range of organisations around the world on living wages and fair pay. And my guest for this podcast is Caroline Rees, who is the President and Co-founder of Shift. Shift is a highly regarded non-profit organisation that advises companies, governments, and investors on business and human rights.

It's a real treat for me to have Caroline here in the room with us because her experience in subjects of human capital and human rights is genuinely extensive and very exciting. It ranges from work done drafting the UN Guiding Principles to her role on numerous advisory councils, including councils advising the Workforce Disclosure Initiative, Harvard's Impact-Weighted Accounts Initiative, and of course the Capitals Coalition. And specifically, it's the work that is being done in collaboration with the Capitals Coalition that we're going to be focusing on today.

And so without further ado, Caroline, welcome, and thank you very much for being with us.

Caroline Rees:

A pleasure to be with you, Angus. Thanks for the invitation.

AB:

You're very welcome. Now, to start with, I wonder, Caroline, if you could please say a little bit more for our listeners about Shift and the Capitals Coalition, and then introduce the work that you have been doing on the Accounting for a Living Wage project.

CR:

Absolutely. Well, as you said, we're a non-profit, a small team, but working globally, with a range of actors to make respect for people's human rights integral to how business gets done.

So we work directly with companies in different sectors and contexts around what are rights respecting practices. And then we work with all of the actors needed to equip markets to recognise and reward those practices. And we work a lot in partnership with other organisations.

We do a lot of consensus-building, multi-stakeholder work. And this project's an example of both. We're working in partnership with the Capitals Coalition to bring human rights and human capital lenses together.

And we've been doing a lot of broad consultation around this question of living wages because our aim is to develop a simple standardised model by which companies can account for progress towards living wages, and be able to represent that ultimately in public reporting. So that's our goal. We're quite a long way through the project at this point and it's been a fascinating journey.

AB:

Brilliant. Yeah, so I can imagine a really fascinating journey, probably fraught with several challenges, I imagine, along the way. But at the risk of asking a very almost stupid sounding question, could you just take us through really the urgency of this issue today? Why is it so important that companies, regulators and investors are thinking about this sort of an accounting framework?

CR:

No, absolutely. I mean, look, living wages are central to addressing the current challenge we have around unsustainable levels of inequality in our societies.

And there's more and more recognition that this level of inequality represents a system level risk to our societies, in the first instance, but absolutely to the businesses and the investors working within them. We're seeing the loss of social coherence and stability, the populism and forms of extremism, the loss of trust in institutions.

These are all effects of the unsustainable levels of inequality that, in many ways, are the product of a system that while it's brought many benefits to many people, has also, on the way, externalised quite a lot of costs and risks onto the most vulnerable folks in society, in the pursuit of maximising profits. And so people have lost faith in the system.

So we have a system level risk and there's nothing more central to tackling inequality than wages. We also see, just at the individual company level, the relevance of this, and there's a great paper out there from Business Fights Poverty and ourselves and others that addresses the business case around resilience, around productivity, retention, recruitment.

There are many individual business level reasons to pay people a decent wage, but we can't forget, and I think particular to the urgency is that we have to tackle this if we're to get inequalities under control and restabilise our societies.

AB:

Yeah, I mean, it is really quite striking when you start to read some of the stats that support this level of urgency. I mean, read in the latest World Inequality Report that the richest 10% in society own around, I think between 60 and 80% of global wealth, and the poorest half systematically owns less than 5% of the wealth. So the time is now is really, I think, very, very clearly the conclusion.

I was also fascinated to pick up on, if I may, what you said about how the system has externalised a lot of these costs.

One of the most mature models that exists within the Sustainable Investment Team at Schroders is a model called SustainEx, where we're really focused on trying to understand the social value of externalities that are created by certain business models.

Externalities was a big issue or big topic that Alex Edmans, at London Business School, covered in his recent paper that has effectively gone viral on ESG. And he talked about externalities being instances effectively where markets are not functioning properly.

And I think, as you've already described, this is a very clear case of that. But if we just think about the challenges associated with what you are trying to do, can you take us through some of the big hurdles that you've had to overcome, or some of the potentially avenues that you've gone down and then turned back from?

Because when we think about externalities, one of the things we as investors are always trying to be conscious of is the degree to which they are material then to organisations themselves. So could you say a little bit, please, about a), the externalities that we're really seeking to overcome, and b), the challenges, please, that you have experienced along this journey?

CR:

Yeah, absolutely. I mean, let me start with that point about externalities because what's been so interesting is to see the ways in which current accounting practices essentially encourage that, if I can put it that way.

Leaders may say frequently, and I think sincerely, that our people are our greatest asset. But of course, they appear as a cost in the P&L, they don't appear as an asset on the balance sheet. And that's argued because while assets are things that you control, and people can come and go, we would say, "Well, yeah, individuals can come and go, but you still control the workforce as a whole." You decide how many people at what ranks or what wages, and so forth. So there are ways that we've structured into accounting the idea that this is a really easy place to cut costs.

We don't invest in our workforce, we can't recognise it as an investment in our workforce when we pay more or do other things to advance our workforce, but it's an easy cost cutting when we want to maximise quarterly earnings and so forth.

And so the accounting has almost encouraged this externalisation, and that was really interesting to us at the core of this. And we did spend some time going down an avenue of thinking, "Well, is there more that could be done to challenge some of these underlying assumptions that accounting reinforces?".

We looked, for example, at the question of, "Well, look, if a company makes a commitment to pay a living wage by a certain date and has not done so by that date, one could argue that they've created a liability under current accounting rules? That they've created an expectation, that that becomes a liability and so forth, and should we model it out that way?”.

But it didn't really work, Angus, because if you think about it, what does that do? It actually creates a disincentive for companies to make a commitment to pay a living wage because they're suddenly going to risk generating a liability.

And we want the opposite, we want to encourage, we want to not just encourage companies to step up to this challenge but have them rewarded, and rewarded by markets for doing that. So we found this, there are some philosophical arguments which we feel need bottoming out and need taking forward. And I think there's much to take forward there.

But for our purposes, having explored some of those avenues, we came back to saying, "Look, we need to think about this more in its own terms of just what are good metrics, what's a good accounting model that can sit alongside the financial statements but give some interesting and valuable insight about whether a company is part of the solution or part of the problem to this?".

So in short, are they contributing to progress towards living wages or are they not? And we're going to lose too much by trying to force that inside the boundaries of current accounting rules.

AB:

Very, very interesting, Caroline, thank you. I'm reminded of the paper that the Capitals Coalition was involved in. I think it was looking at the health utility of income, and really trying to address the human capital erosion, if you will, associated with paying below living wages.

So if we move on a little bit now to really where you have landed, if you could, please, could you walk us through the framework as it stands and the critical metrics?

CR:

Yeah, absolutely. And you'll see that that Capitals Coalition thinking and particular work of Sam Vionnet coming back into that around health. So we have three core metrics, or clusters of metrics. The first is the living wage threshold, and this is quite simply the number of workers in a particular category, and I should just say, we look separately at employees, at what we call core contractors, doing work equivalent to employees, non-core contractors, that are service providers such as catering staff, security staff on site, and then we look at tier one supply chain.

So we have four categories of worker we look at. So let's just say one of those, and the living wage threshold is take that category and multiply the number of people by the living wage benchmark applicable to them. And this idea of threshold is one we think is really, really important because the living wage is literally articulated in the human rights world as a pivotal point, a threshold, the point above which a worker can secure a basic decent life for themselves and their family, and below which they cannot.

So we want to peg that idea that there's a critical threshold here. The second metric set is the living wage deficit. So we are really in interested in what happens when people are below that threshold.

We don't want to have that number buried in a bigger wage number where we can't see where the problem is, so we're focused on the deficit. And we break that out as follows; straight up the number of workers in that category below a living wage and the proportion of workers in that category below a living wage.

And then we have a simple calculation for monetising that using applicable living wage benchmarks, and we can talk further about what those are, but getting to a dollar amount essentially for that.

And then the fourth one is really interesting under the living wage deficit, which is what we think is particularly useful in showing progress over time. And that is what proportion is the living wage deficit of the living wage threshold. Because over time, a workforce may expand or contract, the supply chain base may expand or contract for a whole range of reasons.

But what you do want to see over time is that the proportion of the deficit, the living wage deficit, is reducing in relation to the threshold. So that's a really important one we think for getting that idea of progress over time. And then the third metric is indeed human capital value erosion.

And this is exactly where we leverage the excellent work of Sam Vionnet and others in the Capitals Coalition, working with Sam around this question of the health utility of income, and that work that looked at, well, for every dollar above a living wage that adds to the disability-adjusted life years, so essentially life expectancy, quality of life, life expectancy.

And so we look there indeed at how to value that in disability-adjusted life years, so in that unit. And then putting a valuation, a monetary valuation on that. Now, health is only one of the impacts of living wages, and we're looking at the loss, the erosion of that, where you fall below a living wage.

Clearly, there are many other things in life that are affected, and there are many other costs that are pushed onto the social security network, the tax base. But this is a particularly salient one and it's one for which there are global data sets we can use. So we use that one in the model and we hope over time that we'll be able to enrich that as more data around other issues becomes available.

AB:

Yes, it really is a leading or pioneering piece of work I think. And again, what really struck me when I read that paper was the way in which the human capital is eroded in a compounding manner to the downside, the further below living wages that one gets.

So against that background, you've taken us through the journey, you've walked us through the composition of the framework and the metrics. What's next?

CR:

Yeah, absolutely. So we are in a process now of piloting this beta model that we have with a number of companies, some large multinationals and some much smaller companies, to look at and test the viability of the model itself, how easy or difficult is it for companies to plot this data in and make it work against the data they have?

And the insight that you then gain, because that's ultimately the point. Both for decision making inside the company and for investors and others outside the company, does it give you that greater insight that we believe it should? So we have a number of companies doing that. The companies are taking different types of worker categories. So some are doing it with direct employees, some with contractors, some with tier one supply chain, all of them are taking a couple of geographies to test it out with, and sharing the challenges and hopefully successes as well of doing that so that we can use that to refine the model, if that's needed and where that's needed, and learn the lessons. Inevitably, of course, these are metrics that are not current, not prevalent.

So if this model moves forward, it is going to mean that certain types of data need gathering in a certain way by more companies, many of which are not doing it at present.

But if we can show that it is doable, reasonable and that it is insightful in terms of the results, then we believe that there's a really strong case for reporting standards to start to embed these metrics into reporting requirements for benchmarks to use them, and indeed for investors to engage with companies and ask them for this kind of data.

So we are not just piloting, we're also alongside that already engaging with the investor community. And you and I have connected over this as part of that, and also looking at opportunities already where this could come into reporting standards and benchmarks. I'm happy to say that that metric, the proportion of workers below a living wage, is already in the Johannesburg Stock Exchange's sustainability metrics. It's a voluntary set of metrics, but for their leadership companies.

So starting to see where this can get embedded into practice and make it currency that this is just data you would naturally collect and have, and these are metrics that should be part of what gets disclosed and what gets discussed inside companies.

AB:

Fantastic to hear that on the Johannesburg Stock Exchange. I imagine that you had a similar experience to myself and some of our colleagues on the sustainable investment team over the summer wading through various consultations from an array of standard-setters. Are we to expect or be looking out for the inclusion of some of these metrics in more of these standard-setters' plans as they evolve, do you think?

CR:

Well, it's fully our aim and our hope. I think the fact that inequality is now getting so much attention politically, but as I said before, as a system level risk, climate change and inequality often in the same sentence with each other now, that the scrutiny of wages is going to grow. And we think that in this, indeed, as you say, proliferation of consultations around reporting standards, that this is an opportune moment for this to get embedded in those standards, and we hope to see that over the next two to three years.

AB:

Yeah, fantastic. So it really sounds to me like this is an opportunity to issue a rallying cry really, isn't it? For companies and investors to really start focusing on these issues, if they're not already. But if I were to ask you for one thing that you would like listeners to this podcast to take away with them as we wrap up here, Caroline, what would the message be for you, please?

CR:

Well, I might cheat and make it one answer with two parts, Angus. I think that the first is that we need a nuanced and informed conversation about this. I've said again and again that we are looking at progress towards living wages. We're not going to progress much if the assumptions inside and outside companies is that it's just, "Are you above a living wage? Then you're good. Are you below a living wage? Then you're bad," I don't think I know of a single large company that has looked at living wages even in its own workforce and not found people below the living wage, and been surprised by that. But in way, we should stop being surprised. We need to accept that there are realities around wages and many people are below a living wage, and then start to judge, not on the basis of are you above or below, but are you making progress? Are you part of the solution to this inequality challenge or are you part of perpetuating or exacerbating it?

So progress needs to be the focus, we need to be nuanced and have that informed conversation. And hopefully these metrics can aid that.

And I do want to say that we have massively benefited from the extraordinary work of so many other living wage initiatives that have been doing the hard work of building consensus around how you measure actual wages, what's in, what's out, benefits and so forth, and how you measure a living wage.

And I'm super optimistic there are signs that next year we may already have a global publicly available database of the most credible living wage methodologies, so that companies no longer have to worry that they can't afford to get access to the information in order to know where they are, those barriers should be removing.

So I think we're on a really good track to this being thoroughly doable for companies.

Not saying it's easy, but it's very doable. But at the same time that we have this more nuanced conversation that enables us to focus on progress and not naive assumptions that there shouldn't be people living in poverty who are working.

AB:

Fantastic. I really like that positive note on which to end here, that idea of progress, certainly for investors thinking about change and in the business of trying to value forward-looking change and progress. This is really chimes very nicely.

Just, if I may, could I ask you one slightly left field question, Caroline, because I'm fascinated by everything you have talked about, and I think our listeners would really appreciate this advice, if you will.

What can people go away and read to help inform them about this topic? And in that vein actually, what would you recommend is the best thing for people to do just finally to educate themselves more on this issue?

CR:

Well, I mean, I think I have to plug the report, it seems self-serving. We were a big player in the report, but a report by Business Fights Poverty, the Cambridge Institute for Sustainability Leadership and Harvard Kennedy School with ourselves.

On the business case for this, I mean, I would really flag that. Regardless of points about systems level risk, there are always tough conversations inside companies around these issues, not least at a time of inflation, though I know this is where those on the lowest wages tend to suffer the most, and the case becomes even more compelling in some regards.

But get the business case, equip yourself with all of those other reasons and the just growing body of evidence as to why this just makes sense. So I would definitely flag that.

CR:

But also, I mean, there's a great first report that's come out and a second one that's due, a flagship report coming out later this year from the Business Commission to Tackle Inequality, and part of that commission that, to your earlier point, lays out some of the extraordinary statistics about where we are on inequality, and a whole array of steps that companies can be taking and need to be taking to address the problem amongst which, and perhaps one of the primary ones of which is tackling living wages.

So I think a couple of, to your earlier point, I think, in many ways, inspiring documents around not just why this matters, but what's to be gained from really taking this on.

AB:

Super. I think inspiring is the word of the day for me, Caroline. So with that, let's draw it to a close. Thank you very, very much for joining me today on this podcast, and have a great rest of day.

CR:

Thanks so much, Angus. It's been a pleasure to be with you.

 

 

 

 

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