The UK Investment Association (a trade association representing the UK’s investment management firms) has
adjusted its risk assessment of FTSE index companies based on breaches of best practices or other areas of concern – red for high concern, yellow for medium, and blue for low or no concerns. The specific topics included in the updated risk assessment include:
Diversity – The IA will issue the highest risk level (red) for any FTSE 350 companies whose board comprises of 30% or less female directors – this represents an increase from 20% last year. Companies that have female representation of 25% or less on their executive committee (the equivalent of the US named executive officers) and its direct reports will also receive a red light. Boards that do not disclose ethnic diversity or a plan to have at least one director from a minority background by 2021 will be rated as medium concern.
Executive Compensation – The association announced it is not supportive of compensation actions to adjust COVID-19 pay impacts or for special awards to “catch up” executives. Further, if a company received government support or sought additional capital from shareholders, the association stated it should not pay bonuses.
Climate Change – Companies in financial services, energy, transportation, materials and buildings, agriculture, food, and forest products, that do not address all four pillars of the Task Force for Climate-related Financial Disclosures recommendations – governance, risk management, strategy and metrics and targets – will receive a medium concern. Companies are encouraged to report on climate-related risks in a "consistent, clear and comparable manner" enabling investment managers to make better informed decisions.
UK and European asset managers and regulators have been much more outspoken about ESG and D&I concerns than the US asset managers in the past, as well as less tolerant for compensation actions that could increase executive compensation impacted by the pandemic. While the same conditions or culture may not be present in the US currently, it is common for similar trends to impact US investors and companies down the road and we are already seeing this occur.
