UK investors push ahead on race and ethnicity reporting despite government caution

The social justice protests of 2020 intensified debate about diversity and inclusion (D&I) across the workforce, with the investor community raising the topic as a key ESG priority in engagements with companies.

Nearly two years after George Floyd’s murder, regulators, investors and proxy firms are demanding more disclosure on how companies track the career progress of their racial and ethnic minorities, including reporting on pay gaps.

“If the goal is to encourage equal pay at each career level for racial and ethnic minorities and majorities, then asking organisations to collect that data and having a public reporting requirement undoubtedly offers value,” argues Aneeta Rattan, associate professor of organisational behaviour at London Business School. She also notes that this type of reporting is important as a signal of values, showing that race and ethnicity pay gaps matter as much as gender.

Still, policymakers have been reluctant to mandate specific legislation. The UK government recently stated that ethnicity pay gap reporting “may not be the most appropriate tool for every type of employer seeking to ensure fairness in the workplace”. In its response to a report by the Commission on Race and Ethnic Disparities, which was established in 2020 in response to widespread racial justice protests, the UK government said it wanted to avoid imposing new burdens on businesses as they recover from the pandemic and will not push for mandatory reporting “at this stage”.

Even without legislation, however, investors have been adapting their voting policy to integrate D&I into their engagement outcomes, alongside support for social shareholder proposals. US shareholder proposals on racial justice have seen an increase of 40 percent this year, with Apple registering 53 percent of votes in favour for the tech giant to undertake an independent assessment into its adverse impacts on civil rights.

Responsible Investor reached out to the UK’s 10 largest asset managers to gather their views on ethnicity pay gaps.

M&G reported its ethnicity pay gap for the first time this year, revealing that its mean ethnicity pay gap in 2021 stands at 5.7 percent and its gender pay gap at 29.3 percent.

Abrdn was the only asset manager to provide a detailed comment. JPMorgan Asset Management declined to comment. The remaining asset managers did not provide a comment ahead of publication or failed to respond to RI’s request for comment.

A spokesperson for Abrdn said that, where companies fall short on D&I expectations, Abrdn generally votes against the chair of the nominations committee or, where there is no option to do so, against the annual report and accounts. Abrdn adjusted its voting policy for this year’s AGM season to require boards of investee companies in the S&P 1500 and Russell 3000 to have at least one racially or ethnically diverse member, or otherwise face a vote against the nomination committee chair. This adjustment is in line with advisory firm ISS’s latest voting policy effective from February 2022.

“Our business and the financial sector has a long way to go in achieving ethnic diversity and inclusion,” Abrdn’s spokesperson acknowledges. Since 2020, the asset manager has built capacity to collect ethnicity data and has encouraged its workforce to share data, albeit on a voluntary basis. Last year, it also agreed to publicly disclose workforce demographic data to the US Equal Employment Opportunity Commission (EEO-1 data) and has called on its US portfolio companies to do the same. The consolidated EEO-1 report is a comprehensive breakdown of a company’s workforce by race, ethnicity and gender on an annual basis.

In July 2020, the New York City Retirement System launched a campaign calling on firms in the S&P 100 index to publicly disclose their EEO-1 data. The initiative has so far gathered support from 85 companies.

Still, some point out that ethnicity pay gap reporting is more difficult to implement than for gender pay gaps. There may be concerns related to the legality of storing racial and ethnic data across jurisdictions, and differences in breakdown of ethnic diversity across geographical regions would also form a hurdle, a senior corporate governance expert told RI. The expert added that recruitment and progression are more of an issue than equal pay as such, warning that pay gaps should not be misunderstood as lack of equal pay but as a lack of representation at senior level.

Rattan from London Business School acknowledges that pay gap reporting can be difficult when organisations do not have the necessary infrastructure in place, but notes that once this is put in place reporting can become a systematised process where efforts yield insights without sustained, added difficulty.

She suggests that organisations could devise a question that matches the way a given nation assesses race and diversity, but does not restrict people to just one answer. According to Rattan, the challenge will be in being able to compare different countries’ race and ethnicity pay gaps, and not in the collection of data to evaluate whether one exists.