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Take Five: The New Pay Gap 

A selection of this week’s major stories impacting ESG investors, in five easy pieces.   

From executive pay to pension priorities to climate policy ambitions, events this week suggested a marked lack of consensus.  

The new pay gap – Executive pay is always high on the agenda at this time of year, but its profile was raised both in and outside the AGM this week. London Stock Exchange CEO Julia Hoggett suggested UK firms were being hamstrung in the global marketplace by asset managers and proxy advisors voting down executive pay deals (while apparently backing higher ones in the US), contributing to a brain (and listings) drain. She further implied that the Financial Conduct Authority had missed a trick in its plans to make UK listings more attractive by not including executive pay among a raft of measures already causing concern among asset owners due to their potential to erode shareholder voting rights. Despite regular calls for restraint by pension funds and investment managers, shareholder rebellions on pay are far from common in the UK – but not unheard of, as Pearson and Unilever can attest. Yet fewer than 13% of votes were cast against Barclays’ Directors Remuneration Report this week, even after the recommendations of Glass Lewis, prompted partly by an expensive trading error. With institutional investors reaching for new tools in an effort to “reframe” the executive pay debate, the chasm in understanding on the issue is almost as wide as the yawning pay gap between the top team and the average worker.  

Who do you trust? – Fears about AI went up another notch this week, with bigtech insiders questioning whether the firms developing the technology (or indeed regulators or policymakers) can erect the necessary guard rails to control their creations and avoid potential social harms. Philosopher Yuval Noah Harari, in a guest post in The Economist, shared his fears that AI could bring the Anthropocene era to an end. “Previous tools like the printing press and radio helped spread the cultural ideas of humans, but they never created new cultural ideas of their own. ai is fundamentally different. ai can create completely new ideas, completely new culture,” he said. Digital ministers (not a reassuring phrase in the circumstances) from the Group of Seven had already declared their commitment to implementing policies underpinning stronger guidance and governance. But their stance was undermined by a communique so over-reliant on the ill-defined term ‘trustworthy’ to raise suspicions it had been drafted by a less-than-convincing early iteration of ChatGPT.  

Of pensions and profits – Oil and gas profits were also in the news with higher-than-expected profits announced by BP and Shell among others. Despite many pension funds declaring their frustration at laggardly transition planning in the sector, as engagement yields limited results, divestment still seems to be the hardest word. Recent research shows major oil and gas holdings persist at global asset management firms, across passive and active funds, even while coal exposures diminish. Those arguing for a faster withdrawal from fossil fuel firms have found support from academics at Harvard Business School, and more investors explicitly taking a twin-track approach, engaging with policymakers while upping the stakes at AGMs. But apparently some pensioners are happy with the strategies of the oil majors. One contented customer commented under an article in The Times on Shell’s latest windfall profits: “Well done to both BP and Shell. At least my pension might be safe for this coming year.” Whether the writer was AI-generated, a keyboard culture warrior or just plain short-sighted is not known.  

Litigation bandwagon – Often viewed as the engagement tool of last resort, the profile of litigation has risen inexorably in recent years, with investors and NGOs resorting to legal means to address ESG risks and impacts, alongside the more established practice of pursuing losses stemming from management decisions through class actions. The widening scope of investor-related litigation has been in evidence recently, with Shell, VW, and Adidas all in dispute. After a long wait, it also seems that climate-related actions will finally be heard in US state courts, typically brought by city authorities, after a Supreme Court ruling earlier this week. TotalEnergies has jumped on the climate litigation bandwagon by suing Greenpeace France over a report on the firm’s GHG emissions disclosures. The future of this counter-action by energy firms may depend on the response of shareholders at Total’s AGM on 26 May. 

Anti-ESG blueprint – Perhaps too often, this blog has contrasted unfavourably the progress of the UK on implementing sustainable investment regulation with that of the European Union. From a global perspective, the actions of the USA and China matter way more of course. As such, it is a concern that the blueprint for a state-level ban on integrating ESG factors into investment decisions was passed in Florida this week. Meanwhile, rumours abound of a further delay to the introduction – and possible reduction in scope – of US climate disclosure rules. Ranged against this is the sheer scale of the Inflation Reduction Act, the continued willingness of financiers to align capital with net zero and the extra-territorial impact of European legislation.  

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