Europe

Greater Focus Needed in Workplace Reporting

Eight principles for workplace reporting seek to avoid “negative impact” on the bottom line of investee companies.

Practical guidance for UK companies on employee-related reporting has been issued in a report backed by £37 billion AUM pension scheme Railpen, which looks to further discussion between firms, investors and others to improve disclosures on, and the treatment of, workers.  

The report, written in collaboration with the High Pay Centre, the Chartered Institute of Personnel and Development, Board Intelligence and the Pensions and Lifetime Savings Association, builds on previous Railpen-led research. This earlier paper found that while workforce reporting is gradually improving, it tended to be “insufficiently focused” on actions and outcomes and did not reflect efforts to “engage meaningfully” with workers.  

The new report made recommendations on what good workplace reporting should encompass and its importance for investors. “Improved reporting will deliver more effective workforce engagement and, in turn, improved outcomes for companies, investors and workers,” said David Styles, Corporate Governance and Stewardship Director at the Financial Reporting Council. 

There are currently no mandatory workplace reporting requirements in the UK. Following the introduction of the UK Corporate Governance Code five years ago, which provided a framework for discussions between boards and investors on employee relations, the report said there was still a need for a more “effective, two-way dialogue” between companies and workers.  

 “Meaningful, material and useful” 

Companies need to take a focused approach, the report said, taking account of which data is most relevant to their workforce and strategy – and which are, accordingly, material”.  

Eight key principles were highlighted by the report to provide “meaningful, material and useful” workplace reporting for investors. It said good reporting should be linked to a company’s strategy and performance, include an appropriate mix of data and narrative, be balanced and self-critical, focus on targets, use consistent data points over time, include both directly employed and contingent workers, be disaggregated and have received some kind of external, independent assurance.  

On linkage to strategy and performance, claims by companies that the workforce is their ‘greatest asset’ are often not “accompanied by concrete evidence” of how employment practices relate to wider strategy, according to the report. It instead recommends that companies include an “explicit discussion” of how, and in what ways, their employment practices relate to value creation and the risks and opportunities associated with workforce issues. 

Worker voice mechanisms were also highlighted, due to their potential to lessen the risk of scandals and regulatory issues, as well as strengthening employee engagement. Such mechanisms can also reduce retention risk, limit the recruitment and training costs associated with high turnover, and enable innovation by giving more employees the opportunity to express ideas, the report added.  

Firms including US electric vehicle manufacturer Tesla have attracted criticism this year due to restrictions on the ability of workers to speak out. The firm has used mandatory arbitration clauses in its employment contracts, which prevents employees from taking legal action against the company. This also stops other employees from learning about and acting on shared concerns and restricts investors’ ability to understand workplace conditions.  

Additionally, it means that investors have restricted visibility of instances of racial or gender discrimination.  

Concerns have been raised that such restrictions can significantly increase the risk of employee strikes, a higher turnover of employees and legal risks, which would detrimentally affect both companies and investors.  

The report concluded that investors can support the creation of “meaningful and useful” workforce reporting by being “pragmatic and ready to welcome better disclosure”, even if it at first it highlights significant areas for improvement. They should also be targeted in their requests, it said, focusing on key metrics which are most material to a specific company. Additionally, investors need to be open to an honest conversation and able to share examples of good practice on workplace reporting.  

Privacy concerns 

The report acknowledged that effective workplace reporting by companies is difficult because “certain information can be sensitive, making it difficult to collect – or to disclose. This can include information on sexual orientation, ethnicity and absences relating to mental health. Diversity in the workplace is seen as key by many investors, with diversity, equity, and inclusion (DEI) policies continuing to grow in usage in the investor community.  

It found “no complete examples” of reporting by social class or family income. This is increasingly recognised as a key aspect of diversity and social mobility, as the contacts, confidence and familiarity with the culture of high earning or high status roles can give people from richer and more advantaged family backgrounds an edge in pursuing these types of roles, despite having less ability and potential than other candidates. This means that companies can miss out on recruiting the best candidates, according to the report.  

Additionally, some jurisdictions restrict the collection of certain types of data, or make it potentially dangerous to disclose background or sexuality. The report also found employees’ willingness to disclose this information varies according to geography and culture, limiting investor’s ability to understand the demographic characteristics of the workforce.  

Increasing focus on workplace reporting 

Asset managers are increasingly raising concerns that poor management of ESG issues, including workers’ rights, can have a “negative impact” on the bottom line of investee companies. But efforts to quantify workplace performance and impact have been fraught with practical difficulties and questions over objectivity. The development of a single metric to capture a company’s overall exposure to and mitigation of employee-related risks is considered unlikely . . 

However, greater concerns over social inequalities arising from the pandemic and the cost-of-0living crisis have led investors to continue to push companies to increase transparency over topic including workplace reporting. This has led to a growing interest in the impacts of social-focused policies and processes, as well as the methodologies behind the most widely adopted metrics.  

As well as the Corporate Sustainability Reporting Directive, the  EU’s Corporate Sustainability Due Diligence directive (CSDDD) proposal will require large EU and non-EU companies in the single market to integrate environmental and human rights due diligence into their internal policies and report on performance progress. Firms with more than 500 employees and revenues of at least €150 million will be subject to this directive, but under the CSDDD many companies will still not be obligated to report due to not being quite large enough.  

In July, responsible investment NGO ShareAction launched a campaign calling on UK FTSE 100 finance companies to disclose their ethnicity pay gap. Firms with no reporting procedures in place were urged to begin making such disclosures, whereas those already reporting were asked to improve their transparency.  

Additionally, frameworks which do currently exist recognise gender and race/ethnicity categories of workforce representation most commonly, but there “is less consistency in recognising age, disability, sexual orientation, nationality and other less visible characteristics”, according to Rights CoLab.  

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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