ESG progress needs the sharp and the blunt
A small band of committed investors in Tesco has achieved spectacular success with a shareholder motion on healthy food. This should embolden investors to hold issuers to account on a wider range of social matters — and also contains a deeper lesson about how markets bring about change.
To listen to some in the capital markets, environmental, social and governance investing is all about numbers.
Investors, they argue, need to build up better data about companies’ — and governments’ — characteristics, feed this into their valuation models, and slowly but surely, money will migrate to better ESG performers, lowering their cost of capital.
This week, the think tank Bruegel called for EU governments to publish standardised accounts showing how much of their spending is green, so sovereign debt investors can make informed choices. The price advantage for green and sustainable bond issuers is another example.
According to this vision of responsible investing, a virtuous circle should develop, in which issuers are incentivised to work still harder on ESG, which in turn is good for their financial sustainability. Laggards will either catch up or waste away.
Many studies have been done to investigate whether this effect can be proved to exist — and whether ESG-aware investors do better than their nonchalant rivals. The evidence is mounting that it does, but if the investing world was really convinced, savers’ money would be allocated by default to ESG-tilted portfolios.
So far, it has not been — the broad mass of money is still in general funds, which follow benchmarks defined by neutral factors such as company size and liquidity.
Slow and steady misses the point
Like all economic theories, this attritional, mathematical view of how ESG investors will bend the economy to the better bears only a general resemblance to reality. Actual life is messy, eventful and surprising.
Economic textbooks and graphs have nothing to say about many of the phenomena that actually move markets — the invention of the smartphone, for example, or the personality of Elon Musk.
As those who work in markets know, much of the time they feel like a drama, a story, a game, even a war — but at any rate a noisy human interaction between conscious players, not a silent, steady process like evolution.
Responsible investors who grasp this can achieve remarkable things. Three months ago, a group of shareholders in Tesco, the UK’s leading supermarket chain, filed a motion to be put to its annual general meeting, expected to take place in June or July.
They called on Tesco to disclose how much of its food and non-alcoholic drinks sales are “healthier” products, as defined by the UK Department of Health, and develop a strategy to increase that share by 2030, reporting annually on progress from 2022.
In several ways, this came out of left field. Shareholder motions on ESG issues are rare in Europe, and so far have focused mainly on climate change, at the big oil companies and banks. The Tesco motion took the technique into a completely new area — health.
Moreover, these were not the supermarket chain's biggest shareholders. The action is being coordinated by ShareAction, the UK responsible investing NGO, which gathered the 100 retail investors necessary to file a proposal and enlisted institutions for heft.
The group was able to say it had £140bn of assets under management, but nearly all of that came from Dutch asset manager Robeco. The other six institutions that co-filed the motion are mostly small charitable and religious foundations.
Between them, they probably own less than 1% of Tesco’s shares. They could all divest tomorrow and the share price would hardly flinch. Economic logic would suggest Tesco could ignore them.
Real life is not logical. Tesco sat up and took notice.
Although the Tesco motion was news to most in the financial markets when it was announced in February, a dialogue had been going on for some time. The Healthy Markets Coalition, organised by ShareAction, had been talking to the company, as well as other UK supermarkets and the food manufacturers that supply them, for a couple of years.
They want to know whether Tesco is really committed to helping customers eat more healthily, or is actually quite content to make slight improvements, while relying for sales growth on selling fatty, sugary and salty products that contribute to obesity, diabetes, heart disease and some cancers.
Tesco is in many ways a good ESG performer, and is clearly conscious of its image with responsible investors. It claims to have been the first business in the world to set a net zero greenhouse gas emissions target for 2050 — as long ago as 2009 — and has been commended for its achievements.
In January, it issued a €750m sustainability-linked bond, wildly popular with investors, tied to reducing its emissions.
But when it came to the food it sells — its central activity — Tesco was falling behind peers. Sainsbury and Marks & Spencer had both set targets to increase their healthier sales. Although Tesco had run experiments and found it could raise fruit and vegetable sales 13% with price promotions, and cut chocolate sales 22% by moving displays, it had not implemented these measures more broadly.
Last year, the shareholders had put their demands to Tesco at the AGM in the form of a question, but it produced little response.
The resolution acted like an electric shock. A month later, Tesco agreed to implement all the investors’ demands in its core business. It revealed that 58% of its sales were of healthier products — a higher share than rivals’ — and pledged to raise this to 65% by 2025.
This was a powerful achievement by the shareholders. Tesco hoped they would be pleased and withdraw the motion.
But the investors were not placated. Tesco’s new target covered only its UK supermarkets — 80% of its sales — not its shops in central Europe, nor its Booker wholesale business, which supplies Premier, Londis and Budgens convenience stores. The shareholders stuck to their guns.
This week, after further talks, the two sides have called a truce. Tesco will further improve its food health policy, agreeing to what it had considered too difficult in March — acting to sell healthier foods in the CEE stores and Booker. The investors have pulled the resolution.
David beats Goliath
The changes Tesco has agreed to in the past three months are profound. They require fundamental change in the way it conducts business. They will cost money, take a great deal of thought from management and even carry risk for the company. What if customers don’t like low fat biscuits and lentil burgers? Tesco might get a reputation for being prim and lose a slice of its trade.
The disjunction between the radical change in Tesco’s future path and the tiny force that has brought it about is huge. On one hand, real commercial and financial actions — on the other, merely the threat of something being said.
Why was Tesco so anxious — even desperate — for the motion not to appear at the AGM?
“They avoided their performance on health being put as a question in front of all their investors,” said Simon Rawson, ShareAction’s director of corporate engagement.
Change did not come gradually, because the big battalions of investors crunched better data.
It took time and effort — the Healthy Markets Coalition had done their research thoroughly and talked to UK food companies many times. But the actual advance came very quickly, because the investors’ tactics succeeded brilliantly. Tesco’s leaders did not want the embarrassment of having to look, in front of their top investors, like they were dragging their feet on health.
Progress will not be confined to Tesco. The other UK supermarkets are watching closely — they don’t want to be next. Those in continental Europe are sure to be alert too. The climate change resolutions proposed at Barclays in 2020 and HSBC this year have sent ripples through the banking sector.
Improvement on the plate
This is not just about theories of change. It may seem hard to believe that supermarkets actually determine how healthy we are, but Tesco has 27% of the UK grocery market. If it achieves its target, sales of unhealthy food will fall significantly. Tesco’s decisions will have real effects on the waistlines and arteries of millions of people.
The coronavirus has shown that diet can be an acute health issue as well as a chronic one. Severely obese people who caught Covid-19 were three times more likely to need intensive care than people of healthy weight.
Critics might see investors wringing their hands about healthy eating as an excess of woke liberalism or even as intrusive nannying.
But obesity is estimated to cost the UK £54bn a year in lost earnings, and consumes about 10% of the national health budget. If the country can become healthier, it should also get richer — good for all investors.
Up to now, climate change has sucked up most of the attention of responsible investors, and of the companies interacting with them. That is understandable, and is likely to continue — it is an existential crisis which most of the economy and capital markets are only now beginning to take seriously.
But increasingly — and especially since the pandemic, with all its devastating social effects, and 2020’s upsurge of sensitivity to racial inequality — investors want companies to take action on a broader range of issues.
They can — and should — apply filters and scores to issuers, based on diversity and inclusion, health and safety, or whether they pay a living wage. This is the blunt approach, like cows leaning their way through a fence.
But will these signals filter through to management, through the cacophony of other tilts and preferences, climate included?
All equity and debt investors who really want to make a difference — to their investing performance and to the world, and especially on social issues investors have tended to overlook — should consider sharp, specific, targeted action.
At the same moment as Tesco and ShareAction announced their agreement, Legal & General Investment Management and the Swedish pension fund AP7 are joining UK supermarkets, including Tesco, in writing to the Brazilian parliament, threatening to boycott the country’s agricultural commodities and their producers if Brazil passes the so-called “land-grabbers’ bill”, which will effectively legalise theft of land in the Amazon, provoking even faster deforestation.
Last year, after a protest by the same group, the bill was withdrawn, but it has returned in an even more dangerous form.
The odds of achieving a U-turn look slim. But there is no use investors adjusting their ESG scores for Brazil and waiting to see if its issuers react to their bond spreads going up a few basis points. In a crisis like this, they have to try vociferous protest.
The green bond industry spends millions a year totting up, reporting on and analysing the “impact” it has achieved by financing billions of euros worth of projects the issuers were going to do anyway.
Actions like what Robeco and the others have done at Tesco — without a penny changing hands — take place in a different sphere: human conversation. They can achieve real, rapid, unexpected impact.
It turns out ESG is not just about numbers. It’s about people, too.