UK Investment Association will issue ‘amber’ warning against firms not disclosing on ethnic diversity

IA will also ‘red-top’ companies with 30% or less female directors

The UK’s Investment Association will rate the absence of disclosure on board ethnic diversity at FTSE350 companies as a “significant issue” in its proxy advice for the first time this year. 

The IA is a national trade body for asset managers, and its members represent £8.5tn of investments. Its Institutional Voting Information Service (IVIS) rates companies on issues such as climate change, executive pay, gender diversity and – making its debut as a topic this year – ethnic diversity. 

IVIS will issue an ‘amber-top’ (signifying a “significant issue”) to firms that do not disclose either the ethnic diversity of their board, or a credible action plan to have at least one director from an ethnic minority background this year – a recommendation of the government-commissioned Parker Review into ethnic and cultural diversity on UK Boards.

Last March, that review found that 59% of 256 large UK companies had no minority board members; this rose to 69% among FTSE 250 companies.

Legal & General Investment Management is among those investors to have pledged to vote against all-white FTSE100 boards from 2022, and Federated Hermes EOS, which advises clients with $1trn in assets, will recommend voting against the chair of any company that does not have at least one director from an ethnic background or any “credible plan to rapidly achieve this”.

The IVIS platform has also changed its approach to gender diversity this year to address investors' concerns on slow progress. Companies with fewer than 30% female directors will receive a ‘red-top’ – an increase on last year’s 20% threshold. 

It comes as another UK government-backed initiative, the Hampton-Alexander Review, shows the number of women on FTSE 350 boards has risen by 50% in five years, but a target for at least a third of boardroom positions to be held by women has not been met.

The review, released today, also found there are no all-male boards in the FTSE 350, though there are 16 so-called ‘one and done’ companies, with only one female board member.

“The UK’s boardrooms need to reflect the diversity of modern-day Britain,” said Andrew Ninian, Director for Stewardship and Corporate Governance at the IA. “With three-quarters of FTSE 100 companies failing to report the ethnic make-up of their boards in last year’s AGM season, investors are now calling on companies to take decisive action to meet the Parker Review targets. Those who fail to do so this year will find themselves increasingly under investors’ spotlight.”

State Street Global Advisors recently set out its expectations for racial and ethnic diversity disclosures, saying all portfolio companies should publicly disclose in five areas: diversity strategy, goals, metrics, board diversity and oversight. It also set out its voting intentions for the 2021 and 2022 voting seasons, saying that it would vote against the Chairs of the Nominating and Governance Committees at any S&P 500 or FTSE 100 companies which did not disclose the racial and ethnic diversity of their board.