Investment Institute
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Should companies do more to ease the cost-of-living crisis?

  • 20 December 2022 (7 min read)

Key points

  • As the cost-of-living crisis persists, some companies wanting to act in socially responsible ways can potentially do more to support their most vulnerable customers and deliver a wider societal benefit
  • Alternatively, companies that act irresponsibly and use opportunistic practices at the expense of consumers risk both regulatory scrutiny and reputational damage
  • While there is a short-term tension between the profit motive and the social good, social risks – though more difficult to identify and measure – have become more salient.

The cost-of-living crisis shows little sign of abating. Inflation remains uncomfortably high and continues to surprise to the upside. The energy crunch is proving alarmingly persistent, with OPEC+ determined to keep oil prices higher through a commitment to production cuts.

In domestic energy markets, governments have intervened to shield consumers from some of the impact of rising prices, through measures such as capping unit energy costs and nationalising energy companies (as with EDF in France).

Energy, however, is an exceptional case. Governments have acted because energy companies enjoy uncontested demand which enables them to pass on rising wholesale costs to consumers. Protecting households from this monopolistic behaviour has become a national priority.

Yet many other non-energy businesses continue to pass on rising costs to defend margins, contributing to the inflationary environment and exacerbating the social harm felt by those most affected. No-one wants to see people struggle to buy food or other essential items or services. But ultimately, company management know that lower margins mean lower profits and, inevitably, a lower share price.

But what if, like mortgage lenders granting forbearance to borrowers during periods of economic adversity, a softer line could be taken on companies seeking to pursue a more socially conscious approach? Prioritising social considerations could deliver a wider societal benefit by bringing inflation down faster and hastening a more stable, normalised economic environment.

Taking action

If companies had the freedom and incentive to act in a socially responsible way, what might they do? The most important sectors to household budgets are those supplying basic needs: Energy, housing and food. While governments have stepped in to alleviate the strains in the first, it is in the last - food - where effective action could be taken relatively quickly.

Supermarkets could do more to cross-subsidise basic goods and essentials to support their most vulnerable customers. We have already seen supermarkets in some countries freeze or lower prices. But given the extent of the inflation problem, could they go further and accept a loss on some basic items (milk and bread, say) to help the most hard-pressed make ends meet? Many supermarkets have more fortunate customers who remain prepared to maintain spending on relatively expensive goods like wine and premium food. The profits made on these items could help offset the cost of subsidising prices elsewhere.

This approach need not be entirely altruistic. Such measures have the potential to not only engender stronger customer loyalty, but also to enhance a company’s reputation and increase its market share over the long run.

Risks of acting irresponsibly

Regrettably, some businesses appear to be using inflation as an excuse to gouge prices or engage in behaviour that preserves margins with scant regard to the threat of a consumer backlash. Given that consumers may eventually recoil at this practice (and the practitioner), there is a sound long-term economic case for companies to resist the temptation to engage in it. Yet, it seems to be a growing trend.

Moreover, companies viewing inflation as an opportunistic way to make super-normal profits could risk more than a blow to their reputation and long-term economic health. Certain monopolistic sectors – telecoms for example – have come under regulatory scrutiny in the past and may risk doing so again. Some UK mobile phone companies will soon introduce price rises equal to the rate of inflation – currently around 10% on the Consumer Price Index measure – plus almost 4%. There is no reason why it costs 14% more to transmit data just because general inflation is 10%. Reputationally, this poses a clear risk to companies; but regulators may also take a dim view of arbitrary price rises amid a cost-of-living crisis.

The investment dilemma

Amid the blizzard of issues confronting investors today, weighing the social implications of company actions can be a challenge. Most portfolios using an environmental, social and governance (ESG) framework have abundant metrics and information to measure the ‘G’ and the ‘E’ risks associated with a company’s operations. Social risks and their potential financial costs, however, are more difficult to identify and measure. Yet given that human welfare is at the centre of most things - from economic activity to the fight against climate change - there is an argument to say the ‘S’, rather than being the lesser element of ESG, should be considered the most important.

The adversity currently being endured by so many has perhaps begun to highlight the merits of this. But the short-term tension between the profit motive and the social good remains. Is it better for companies to make explicitly social choices now, and for shareholders to balance the positive impact of those with their fiduciary duty, than to allow inflation to run abnormally high for longer?

Unfortunately, there is no easy answer to this. But it is surely a question we should all consider as the worst inflation crisis in a generation continues to rage.

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