Investors encouraged to monitor enterprise-wide pay practices rather than just executive compensation.
One of the more obvious indicators for investors looking to ensure a company is truly engaged with the S element of ESG is the level of trade union engagement, said Luke Hildyard, Director of UK think tank High Pay Centre.
Speaking at the inaugural ESG Conference of the Pension and Lifetime Savings Association, Hildyard said, “If a company engages with trade unions, it guarantees standards and accountability for that company over their working practices and also ensures that the company is less likely to become involved in major regulatory or legislative problems related to employment.”
Investor engagement with companies on social issues is much more advanced elsewhere in Europe, he noted. One area on which investors could focus more attention is pay practices across the entire company, taking note of not only executive pay but also median pay rates and the lowest quartile. A “significant minority” of investors are now voting against “egregious” pay awards to directors, particularly those that availed themselves of the UK Government’s pandemic support schemes.
“The Covid-19 pandemic brought to light issues that have been around for some time,” he said, noting the levels of economic inequality in the UK (only Bulgaria has a worse record among other European countries). Moreover, 50% of households in poverty have at least one family member in work.
During the pandemic, the jobs with the highest health risk were also those that were generally the lowest paid. “The awareness of the difficult working lives many people have was heightened during the pandemic. There is a sense in the investment community that we need to do something to address that,” Hildyard said.
Building back better
The investment community has a role to play in the heavily promoted ‘build back better’ approach, he added. By monitoring how companies adhere to this philosophy, investors can help to create a “happier, more prosperous company with better outcomes for everyone”. Ultimately, investors and beneficiaries will benefit from improved productivity that a focus on workforce and relates social can bring.
Scarlett Brown, Policy Consultant for Corporate Governance and Responsible Business at the UK’s Chartered Institute of Professional Development, said investors are becoming more aware of the importance of the health and wellbeing of companies’ employees. In the pandemic, this has become closely related to whether companies enable their employees to work from home if appropriate. Enabling home working involved trust in those employees on the part of a company.
Those organisations that already had a “bank of trust” with employees and good corporate cultures were able to survive, and in some cases thrive, during the pandemic, she said. Such organisations empowered managers and front-line staff. One bank devolved more power to branch managers during the pandemic, for example.
“I think we will see more of the good practices that emerged during the pandemic as businesses address the idea of building back better in a way that does not leave people behind,” she said.
Brown raised the issue of the accuracy of reporting ESG risks, noting that standards for governance reporting were highly structured, environmental reporting frameworks were developing, but social risks were the “poor relation”. The Institute is addressing this through a study with the High Pay Centre and others to develop a framework for reporting.
Investors expect to see an increase in engagement with companies on social issues in the coming 12 months, according to a poll conducted during the session. Eighty-six per cent of those attending said engagement would increase, although the audience was more divided on whether trustees were currently discussing the S in ESG more than 12 months ago – 38% said yes, 33% no and 29% did not know.