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Investors to probe FTSE companies on climate change and diversity

Author: ICAEW Insights

Published: 20 Mar 2023

Women and people from minority ethnic groups on boards will be a major focus of the annual general meetings season this year.

Investment managers are stepping up their focus on diversity and climate change reporting at the UK’s top public companies as the season of annual general meetings (AGM) begins, according to the Investment Association (IA).

This year, the trade body for investment managers is increasing its existing diversity targets to issue a red top – a warning signal – to FTSE 350 companies where women represent 35% or less of the board, and 30% or less of the Executive Committee and their direct reports. 

IA is also warning that investment managers will also continue to issue a red top to FTSE 100 companies that have not met the Parker Review target of at least one director from a minority ethnic group.

At the end of 2021, 89 FTSE 100 companies had met the target of having at least one person from a minority ethnic group on its board. The Parker Review expected 94% of the top companies to be complying with the target by May 2022. For comparison in 2016, only 47% of FTSE 100 companies had people from minority ethnic groups in their boardrooms.

Peter van Veen, Director, Corporate Governance and Stewardship, ICAEW, said: “Improving diversity on boards has been on the AGM agenda for at least a decade, if not two. So, by now boards should really have met the government’s fairly low bar of 40% women on boards. As the Parker Review outlines, improving ethnic diversity on boards is also much needed.

“Diversity on boards is not just a numbers game, it is about broadening the skills and thinking on boards that allows them to be more in tune with stakeholders and ultimately improve shareholder returns over the long term.”

According to the latest research by Cranfield School of Management and EY, The Female FTSE Board Report 2022, 48 FTSE 100 companies have met the new target of 40% women on their boards. 

However, the report said the average of 40% across the FTSE 100 companies masked the difference between the top company Diageo with 64% women on its board and Endeavour Mining Plc with 22% women on its board. Furthermore, 18 companies have 50% or more women on their boards, while 10 companies have 30% or less women on their boards. Among the FTSE 250, 110 companies met the new target of 40% women on their boards. 

With climate change presenting one of the biggest risks to the long-term sustainability of a company, investment managers will be looking for businesses to explain how climate change will impact them and how they are mitigating the risks.

In its Annual Review of Corporate Reporting 2021/22, the Financial Reporting Council (FRC) found that “companies in our review had generally risen to the challenge of mandatory TCFD [Task Force on Climate-Related Financial Disclosures] reporting and, in the main, provided the TCFD disclosures relating to governance, risk management and strategy that are ‘particularly expected’ by the Listing Rules.” 

But the FRC said companies “could significantly improve their climate-related reporting”. It added: “We may challenge those that disclose significant climate risks or net zero transition plans in narrative reporting, but do not adequately explain how this has been taken into account when preparing their financial statements.”

The connectedness of ‘front-half’ and ‘back half’ climate-related disclosures was an issue explored in a recent report Climate-related reporting: sharing reflections on the 2021/22 reporting seasonpublished by ICAEW’s Financial Reporting Faculty. 

The report identified several reasons why the emphasis on climate-related risks in the front half of annual reports is not always consistent with impacts disclosed in the financial statements (the back half) including the maturity of reporting processes within companies, the relative timeframes considered in narrative reporting compared with financial statements and, in some cases, a lack of robust challenge from audit committees.

Sally Baker, Head of Corporate Reporting Policy, ICAEW, said: “It’s generally recognised – and accepted – that most entities are on a journey when it comes to climate-related reporting. They may not be at the end of the journey yet, but they are striving to get there and, in most cases, are making good progress. 

“In the meantime, explaining any disconnects between the front half and back half of annual reports or disclosing when data is not currently available will be valuable to investors and other stakeholders and we encourage entities to provide this type of information. Transparency is key.”

Ahead of the AGMs, the IA – whose 270 members collectively manage over £10trn for clients – issues shareholder priorities that outline the main areas investment managers want companies to consider as drivers of long-term value.

Andrew Ninian, IA Director for Stewardship, Risk and Tax, said: “The AGM season brings to the forefront the issues that investment managers have been engaging on with FTSE-listed companies during the year, with companies’ response to climate change and the diversity of their board and top leadership teams remaining a key focus due to their long-term nature and potential impact on company value.”

Ninian also cautioned company directors over executive pay levels, especially given the challenging economic conditions facing the UK. He said: “Executive pay will also stay firmly in the spotlight in this year’s AGM season, as the cost-of-living crisis continues to bite. Investors will look to companies to show restraint on pay for their top leadership team and ask that it reflects the wider stakeholder experience, including the lowest paid employees and vulnerable customers.”

Van Veen added: “CEOs and their boards need to be particularly in tune with the current cost-of-living crisis in determining executive pay increases. Any increases in executive pay over and above those to staff more generally will be difficult to justify in the current environment.”

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