Investment managers are turning up the pressure on UK companies to improve ethnic and gender diversity on their boards; and have set out their expectations ahead of their annual general meeting (AGM).
The Investment Association (AI) announced that it will, for the first time, issue an ‘amber-top’ – the second highest level of alert – to FTSE 350 companies that do not disclose either the ethnic diversity of their board; or a credible action plan to achieve the Parker Review targets of having at least one director from an ethnic minority background by 2021.
“The UK’s boardrooms need to reflect the diversity of modern-day Britain. With three-quarters of FTSE 100 companies failing to report the ethnic make-up of their boards in last year’s AGM season, investors are now calling on companies to take decisive action to meet the Parker Review targets,” stated Andrew Ninian, Director for Stewardship and Corporate Governance at the Investment Association. “Those who fail to do so this year will find themselves increasingly under investors’ spotlight.”
MORE PROGRESS ON GENDER DIVERSITY
Investors are also seeking greater progress on gender diversity. Companies with boards comprising 30% or less female directors will also receive a ‘red-top’ – an increase on last year’s 20% threshold. Red top denotes a ‘strong’ concern, followed by amber, the second highest level of concern.
Earlier this week, the Hampton-Alexander Review reported that more than a third (34.3%) of FTSE 350 board positions are now held by women; representing a 50% increase over the last five years. However, it also wants to see further progress, as reported.
CLIMATE CHANGE CONCERNS
Climate change is another issue topping investors’ concerns, with the AGM season giving investment managers the opportunity to hold companies to account; and ensure they are considering the impact of climate change on the long-term value of their businesses.
This year, companies in high-risk sectors, which are ‘potentially most affected by climate change’ (such as financials, energy, transportation, materials and buildings, agriculture, food and forest product) which do not address all four pillars of Task Force for Climate-related Financial Disclosures (TCFD) will also, for the first time, receive an ‘amber-top’.
The four pillars of TCFD include: governance, risk management, strategy, metrics and targets. According to the IA, investment managers want to see companies reporting on climate-related risks in a consistent, clear and comparable manner; enabling managers to make better informed investment decisions – ultimately to the benefit of savers and investors. The IA champions represents around 250 members who manage around £8.5 trillion of assets.
CLEAR CONSISTENT DATA
“The UK is now at critical juncture as we look to reach net zero by 2050. As stewards of the economy, investment managers have an important role to play in supporting companies transition to a more sustainable future,” explained Ninian. “Having clear and consistent data on the climate-related risks faced by companies is vital to achieve this, and investors will now be placing additional pressure on those that fail to provide this information.”
Investors will also continue to shine a spotlight on executive pay, having already cautioned companies to treat their executives in line with the rest of the workforce; and remain mindful of the pandemic’s impact on society. “Investors have warned remuneration committees not to compensate executives for reduced pay as a result of the pandemic by adjusting this year’s remuneration, whether through ‘catch up’ awards or disproportionate salary increases,” added Ninian. “Investors also do not generally expect bonuses to be paid if a company has taken government or shareholder support – any company that chooses to do so is expected to provide a clear rationale.”
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