Ethnic Diversity, Climate Disclosures to Top UK Asset Manager Priorities

Investment Association to also focus on audit quality, executive pay and pensions of FTSE-listed firms in 2021 AGM season.

Large UK-listed corporates will come under greater pressure from institutional investors to increase ethnic diversity at board level during this year’s AGM season.

For the first time, the Investment Association (IA) will sanction FTSE 350 companies which do not disclose either the ethnic diversity of their board or a ‘credible action plan’ to achieve Parker Review targets by issuing an ‘amber top’ via its Institutional Voting Information Service (IVIS).

As well as this focus on ethnic diversity, the IA’s shareholder priorities for 2021 reflect higher investor expectations on climate change, audit quality, stakeholder engagement and executive pay.

Rather than instructing its 250 members, which collectively manage £8.5 trillion, how to vote at AGMs, the IA uses its IVIS information service to flag areas of concern or breaches of best practice. ‘Amber’ suggests a significant issue to be considered, while red signals the strongest level of concern.

The Parker Review requires FTSE 350 firms to have at least one director from an ethnic minority background by 2021. A 2020 report on the Parker Review found that 11 FTSE 100 firms had appointed directors from an ethnic minority background since the review, leaving 37% with no ethnic minority representation on their boards.

Investors are also seeking greater progress on gender diversity, with FTSE 350 companies whose board comprise of 30% or less female directors receiving a ‘red-top’ – an increase on last year’s 20% threshold.

According to figures released by the Hampton-Alexander review today, the number of women on FTSE 350 boards has grown by half over the last five years.

In addition, the IA is calling for more detail in climate-related disclosures from large UK firms, following the government’s decision to mandate reporting in line with the recommendations of the of Task Force for Climate-related Financial Disclosures (TCFD).

Under the IA’s new guidance, companies in high-risk sectors – identified by the TCFD as ‘potentially most affected by climate change – will receive an ‘amber-top’ if their disclosures do not address all four pillars of the TCFD framework.

In particular, the IA says members are looking for greater clarity on emissions-reduction targets, more detail on lines of responsibility for climate policy, as well as more information on implications for capital management.

The overall aim is to ensure climate-related risks are reported in a consistent, clear and comparable manner, enabling managers to make better informed investment decisions.

“Investment managers have an important role to play in supporting companies transition to a more sustainable future. Having clear and consistent data on the climate-related risks faced by companies is vital to achieve this,” said Andrew Ninian, Director for Stewardship and Corporate Governance at the Investment Association.

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