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What’s next for the S in ESG?

4 Aug 2021

Karen Hurst is senior policy adviser for the PLSA

When the Department for Work and Pensions launched a surprise call for evidence looking at the risks and opportunities of the S in ESG earlier this year, it was a timely reminder that climate change alone will not, and should not, dominate the ESG debate in 2021.

And it is not just the government that is taking an interest – 2021 has seen the impact of investors on high profile com- panies make the mainstream, and not just the financial, headlines. For instance, the recent floatation of Uber showed that investors are as concerned about the treatment of the workforce as they are about generating returns.

In our annual voting guidelines, published in March 2021, the PLSA urged shareholders to consider companies’ treatment of their workforce during the lockdown period. Did they prioritise the safety of the workforce above all else? Were they accepting government support for workforce pay whilst still seeking permission from stakeholders to increase executive pay?

However, as we start to all look to what we hope to be a more normal life again, it is almost certainly the case that the events of the past year or so will result in a permanent change in our expectations of the workplace. There continues to be significant debate about returning to the office, with the needs of different groups of staff not necessarily aligned.

The end of furloughing is likely to bring with it a range of challenges for companies impacted financially by lockdown. Add into the mix the growing scrutiny of investment in areas that have a poor human rights record, and it is clear that climate is not the only thing investors need to be thinking about in 2021.

Of course, though the circumstances have changed, many of these issues are not new, and certainly not new to pension funds looking to invest responsibly. In the PLSA’s 2016 report Hidden Talent we found that PLSA members overwhelmingly looked at data in annual reports on workforce stability, skills and capabilities, engagement and composition as evidence of the wider performance of the company.

Despite this, we still found that disclosure was lacking – only 43% of companies discussed their workforce as a source of value, for example. Less than half discussed performance in relation to a measurable target.

There are already a number of initiatives to help members encourage companies they are invested in to improve this. Our ‘Worth of the Workforce’ Stewardship toolkit, for example, recommended annual reports should be used to detail corporate culture and working practices in a narrative form, underpinned by consistent, concrete data on metrics such as diversity, staff turnover and investment in training.

We have also supported the Workforce Disclosure Initiative, an investor coalition aiming to collect comprehensive and consistent data to help with analysis.

Given the continued focus, we are pleased to be launching another round of research, this time with the CIPD, High Pay Centre and RPMI Railpen, which will look at how disclosure has improved. Over the coming months we plan to revisit which metrics our members say they value and analyse how far FTSE companies actually report against them.

We believe this work will be important not only in raising awareness of the need for comprehensive reporting, but also to ensure that the sector is able to demonstrate to policy makers where the gaps are and how they in turn can support the industry in ensuring that the ‘S’ in ESG is not forgotten.

We look hope to be able to publish an update on this work later in 2021.

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