Living wage: a social investment

The implementation of the Corporate Sustainability Reporting Directive (CSRD) from 1 January 2024 requires many organisations to provide insight into their application of living wage ('Living Wage') in their own organisation and their ambitions in the value chain. The creation of this insight also provides an opportunity to actually budget for the impact, both on the possible adjustment in their own organisation and expected adjustments in the value chain, argue PwC experts Bas van de Pas and Corien Dieterman.

From social sustainability issue to financial issue

Living wage is a well-known concept from the United Nations' Sustainable Development Goals, specifically from Goal 1: no poverty. Its real meaning became tangible for the Netherlands and Europe in the autumn of 2022, when the legal minimum wage was quite noticeable no longer a living wage. It could no longer provide for groceries, energy bills and basic needs.

An adjustment of the legal minimum wage to an actual living wage was inevitable in many countries. This adjustment proved to not only be a social sustainability issue for organisations, but more importantly an acute unbudgeted financial issue due to unforeseen wage cost increases. Many Chief Financial Officers and HR directors in the Netherlands and in Europe saw their salary budgets dissapear due to unexpected and necessary pay rises.

Impact of 'doing the right thing': from human rights to organisational strategy

Organisations that took the sustainability agenda serious and had already agreed living wage levels with their suppliers in different countries, they know the impact of the social investment of 'doing the right thing'. Respecting human rights leads to reduced exploitation in the local and international supply chain and it impacts the employer brand to eliminate modern slavery. The cost impact is also clear; the adjustment in labour costs and how this affects cost prices. As a result, to pay or not to pay a living wage has a direct impact on an organisation's strategy.

Evidence from CSRD can trigger knock-on effect in chain

The CSRD coming into force on 1 January 2024 requires proof of many organisations on whether they are actually paying a living wage in their own organisation, as well as as a description of the actions or ambitions to positively influence this topic throughout the value chain. The sustainability directive allows a limited number of data providers for proof of living wage. PwC has a formal partnership with one of them, Wagemonitor.org. Besides conducting benchmarks and impact analyses for clients, PwC and Wagemonitor have also collaborated in a global study on the role of living wage in sustainable business.

This Global Living Wage Survey shows, among other things, that:

• 67 per cent of respondents consider paying a living wage to be a priority;
• 24 per cent actually pay a living wage;
• 54 per cent of respondents who do not currently pay a living wage expect to do so in the next five years;
• the drivers for paying a living wage range from 'fair pay', 'a cost of living allowance', 'attracting and retaining talent' and 'implementing and giving confidence to the sustainability agenda'.

In case these indications come true globally, a domino effect in the chain is to be expected. Not only in the social domain of the sustainability agenda, but especially with regard to financial planning and cost price effects. This insight into price effects can influence strategy and decisions on 'far- or nearshoring'. Timely insight and adequate actions are necessary.

Organisations need to gain insight into the data of their own workforce as soon as possible; what is currently being paid at which location? How does that compare to the local minimum wage and to the local living wage? Then it requires an estimate of the financial impact; whether the aim is living wage or  obligatory local minimum wage adjustment, it will cost more. Finally, organisations are advised to draw up a vision and implementation plan on how to address this. Part of this is an assessment of how strongly (or not) your organisation leans on (too) low wages and to what extent this affects your business strategy. Based on this, you can then take desired and targeted actions.