UK pension schemes are among a $7.9tn (£6.1tn) coalition of investors calling for increased disclosure from companies about their workforce, which campaigners say can help investors to safeguard long-term returns.
The Workforce Disclosure Initiative, a ShareAction project funded by the UK Department for International Development, will initially send a survey on workforce policy to 50 of the largest UK companies, alongside 25 international mega-caps.
Environmental, social and governance factors are becoming increasingly important when setting investment strategy, as threats such as stranded assets loom on the horizon.
But industry groups say that schemes are still not being provided with the information they need on how companies handle their workforce, necessitating the WDI project.
Most trustees do tend to be drawn from certain demographics who might have quite set views about what is and what isn’t material to investment issues
Luke Hildyard, PLSA
Signatories include the Universities Superannuation Scheme, RPMI Railpen and the Strathclyde Pension Fund, alongside asset management firms such as Schroders and Legal & General Investment Management.
Survey aims to trigger investor collaboration
The standardised survey will ask for information on gender diversity, employment type, and staff turnover, among others.
Once the process has been trialled with the 75 companies for a year, ShareAction plans to expand the campaign to cover a much wider corporate universe.
The project is aiming for collaboration between investors, and will not seek to trigger divestment from any non-compliant companies in the near future, according to Lisa Nathan, good work programme manager at ShareAction.
“It’s very early days for this sort of initiative, so it’s very much about starting off the dialogue and starting off the engagement,” she said.
Nathan added that cooperation between investors on disclosure was key to ensuring requirements do not swamp companies or confuse investors.
“What we really want to do is consolidate the disclosure to make sure it’s actually useful [not just] for pension funds, but for companies as well,” she said.
The case for investing in workforces
The impact of good and bad workforce practices on investor returns is being made clear by a growing number of studies.
A 2014 survey by consultancy Aon Hewitt found that the top quartile of firms ranked by employee engagement levels outperformed the benchmark return to shareholders by 4 per cent, while companies in the bottom quartile underperformed by 8 per cent.
A 2016 report by the Pensions and Lifetime Savings Association also pointed to scandals such as bank manipulation of Libor as anecdotal evidence that poor workforce management – in this case poorly structured incentives – can damage a company’s share price.
Despite this, Luke Hildyard, the PLSA’s policy lead on stewardship and governance, said the “E” and “G” of ESG have attracted the most focus from investors.
“The ‘S’ has been a little bit neglected by contrast. That’s not to say that the environment or the governance have been overdone,” he said.
The PLSA’s toolkit for encouraging better reporting focuses on workforce composition, stability, skills and engagement as factors affecting a company’s performance.
Investors should look for information on staff turnover, investment in training, engagement, employment type, pay ratios, accidents and illnesses, and diversity as indicators of a company’s progress on these factors.
Can small schemes take action?
However, concerns still remain about the viability of ESG investing as a whole for the UK’s small pension funds.
“They don’t have the governance budget or the room for manoeuvre that a large scheme has,” said Neil McPherson, managing director of trustee firm Capital Cranfield.
He added that small schemes’ reliance on pooled funds made it even more difficult to have an impact.
Law Commission says trustees can take ESG into account (to a point)
In 2014, the Law Commission published its much anticipated report clarifying the fiduciary duties of trustees and called upon the Pensions Regulator to provide further guidance on the subject.
Hildyard suggested schemes could put pressure on their investment consultants to effect change in this area, acting as representatives for multiple schemes.
He added that ensuring greater diversity on trustee boards may disturb a certain lack of interest in ESG investing.
“Most trustees do tend to be drawn from certain demographics who might have quite set views about what is and what isn’t material to investment issues,” he said.
However, Hugh Nolan, director at consultancy Spence & Partners and president of the Society of Pensions Professionals, argued that the diversity of opinion between trustee boards means it is difficult for small schemes to agree a collective stance.
“If you’re a small pension fund and you’re invested through managed funds… they’ve got lots and lots of different clients,” he said.
He commended efforts such as the Association of Member Nominated Trustees’ red-line voting programme for combating some of these issues, but said the active stances behind ESG investment will continue to be unappealing to some boards.
