Annual reporting expectations outlined on diversity, climate and executive pay

The proposed colour coding of annual reports that fall short of these expectations during the 2021 AGM season has been announced by the Investment Association (IA).

IVIS, the IA’s Institutional Voting Information Service, does not make recommendations to its members on how to vote. Instead, using the IA’s guidelines as the basis for its analysis, it colour codes each FTSE company's annual report as either a ‘blue top’, ‘amber top’ or a ‘red top’, to reflect any breaches of best practice or highlight areas of concern. Red denotes the strongest concern, followed by amber, which shows a significant issue to be considered. A 'blue top' indicates no areas of major concern.

Diversity – 'red and amber-top

IVIS will now 'red-top' any FTSE 350 companies whose board comprises of 30% or less female directors – this represents an increase from last year when companies with a board that comprised of 20% or less female directors received a 'red top'. Similarly, FTSE 350 companies that have female representation of 25% or less on their executive committee and its direct reports will also receive a 'red-top'. FTSE SmallCap companies in the same positions will instead receive an 'amber-top'.

Looking at ethnicity diversity, an ‘amber-top’ will be given to FTSE 350 companies that do not disclose either the ethnic diversity of their board, or a credible action plan to achieve the target set out in the Parker Review of having at least one director from an ethnic minority background by 2021.

Climate change – 'amber-top'

Companies in those sectors identified by the Task Force for Climate-related Financial Disclosures (TCFD) as potentially most affected by climate change, which includes financial services, energy, transportation, materials and buildings, agriculture, food, and forest products, that do not address all four pillars of the TCFD's recommendations – governance, risk management, strategy and metrics and targets – will receive an ‘amber-top’.

The IA is very clear that it considers that investment managers have an important role to play in supporting companies as they transition to a more sustainable future. They want to see companies reporting on climate-related risks in a "consistent, clear and comparable manner" enabling investment managers to make better informed decisions.

Executive pay

Having already cautioned companies to treat their executives in line with the rest of the workforce and remain mindful of the pandemic’s impact on society, the IA has reiterated its warning to remuneration committees not to compensate executives for reduced pay as a result of the Covid-19 pandemic by adjusting this year’s remuneration, whether through ‘catch up’ awards or disproportionate salary increases.

Investors also do not generally expect bonuses to be paid if a company has taken government or shareholder support – any company that chooses to do so is expected to provide a clear rationale.