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The systemic crisis arising from COVID-19 is giving rise to new avenues of inquiry for the responsible investor. If ESG factors didn't seem important before, they certainly should now. And it’s vital to ensure difficult decisions, such as cutting personnel costs, are executed in a delicate and ESG-friendly way.
Chief among new ESG filters are working from home stratagems, furlough policy, and, of course, sick pay compensation.
One particularly glaring example of a lack of ESG accounting comes from the UK pub chain JD Wetherspoons. After being forced to close all 850 of its pubs—following the UK coronavirus lockdown—the chain neglected to guarantee worker wages, sprouting a grassroots campaign of condemnation against Wetherspoons. The actions of premier league football club, Tottenham Hostpurs, is another. They have maintained player’s wages at millions a year, while asking taxpayers to pick up the bill for furloughed lower paid employees.
With any luck, investors won't have to place importance on these factors for too long. Nevertheless, it doesn't hurt to be prepared—which is, ironically, the primary concern of ESG investing.
Accounting for ESG amid systemic risk
Despite recovering over 15% from its mid-March lows, the FTSE 100 lost a quarter of its value in 2020, as investors turned tail toward less hazardous pursuits. Although the downturn looks far from over, accounting for ESG factors could help circumnavigate higher risk investments.
According to Guillaume Mascotto, head of ESG at American Century Investments, using ESG filters could aid exposure to higher-quality issuers.
"We believe that an investment-led and materiality-focused ESG integration program can help minimise downside risk otherwise not captured by traditional financial analysis," he said recently in press reports.
Similarly, Ben Palmer, head of responsible investment at Brooks Macdonald, said that companies harnessing ESG often "outperform the peer group and wider market."
The importance of integrity
While Covid-19 has thrown a veritable spoke in the wheel of value creation, a deep-rooted reputational risk remains the crux of investor concerns.
The media, business, and the government rank among the least trusted in society today. That's according to the 2020 Edelman Trust Barometer, which exposed a profound public scepticism toward these sectors. For business, in particular, mistrust only leads to one thing: divestment.
The UK's corporate governance code recently underwent a revamp courtesy of the Financial Reporting Council (FRC). The new rules underscore the value of both corporate culture and remuneration reporting, to reinforce business integrity and minimise reputational risks.
Flexing the new mandate, the FRC recently rebuked numerous listed companies for complying with governance rules for compliance alone—rather than in an effort to deliver fundamental utility. The issue with feigned transparency is that investors can often see through it. Companies transcending what's required of them are few and far between. But when they do come along, it's an opportunity worth seizing.
Remuneration committees are developing a remarkable insight into this kind of value creation—making connections between appropriate remuneration policy and investor endurance. With the new regulations fresh in mind, remuneration committees have broadened the scope beyond the routine executive pay quotients and are starting to incorporate ESG factors. Now, remuneration reporting stretches across a litany of ethnicity and gender disparities, encompassing information such as job description and performance review, as well as the typical pay ranges and grades.
Diversity and equality
Equality—beyond all else—is a critical constituent of effective remuneration policy. In 2015, the UK government assented to a report which looked to bolster female representation on FTSE 350 companies to 33% by 2020. Despite the recommendation, the quota still hasn't been reached.
In the UK, gender inequality issues have flared up over the past few years. The country ranked as the 21st most equal nation in the world in 2019—six places down from the previous year. Moreover, according to the Global Gender Gap report 2020, the gender pay gap in the UK was 16%, almost 10% higher than that of Norway or Sweden.
It's perhaps no surprise. In the past few years, UK retail giants Tesco and Asda provoked numerous avoidable gender discrimination suits. In 2018, Tesco faced a $4 billion equal pay claim, after 10,000 female clerks demanded parity with male warehouse workers. More recently, in January, an employment tribunal ruled in favour of female Asda shop floor staff, following pay disparities with male contemporaries.
Not only did this affect the retailer's bottom line, but it also caused irreparable reputation damage. To add salt to the wound, these issues could have been avoided by adhering to ESG best practice. Harnessing data to identify variations in employee pay grades, and job descriptions, and demographics, could have curtailed claims and minimised investor value loss.
Ken Charman is CEO of HR and rewards data platform uFlexReward