Why the ‘S’ of ESG is now a reward and benefits issue twice over

We are living in extraordinary circumstances. And people are reacting in extraordinary ways. From the good – the daily tales of altruism in our communities, the continued hard work and resilience of NHS staff, cleaners, postal workers and many others – to the less good.

Corporate behaviour has seen the same variety of responses. There have been tales of great generosity and kindness from senior executives to their staff, with leaders who are genuinely interested in ensuring that their employees come out of the crisis as mentally fit and financially stable as possible.

There are others who have taken more time – sometimes after media and public pressure – to do likewise.

Investors such as workplace pension funds should be paying attention. As Mark Carney, former governor of the Bank of England, recently noted, companies will be judged by “how they treated their employees, suppliers and customers, by who shared and who hoarded”.

That, in turn, could affect a company’s attractiveness as an investment prospect for pension schemes. Although the benefits of incorporating environmental, social and governance (ESG) factors into financial analysis and investment decision-making are increasingly understood, and playing a greater part in defined contribution schemes’ default funds, the ‘S’ of ESG has been relatively neglected.

However, a company that has a motivated, fairly treated and engaged workforce is, evidence suggests, likely to perform better over the long-term. This is an issue the PLSA has brought to the fore in our Hidden Talent and Understanding the Worth of the Workforce programme of work.

Yet, it is one thing for a company to discuss its pioneering approach towards flexible working, health and safety or mental health in its Annual Report, and quite another to put this successfully into practice under the immense financial stress and uncertainty caused by coronavirus.

It is therefore more vital than ever that investors, such as pension schemes, understand and assess the attitude and behaviour of the companies they invest in towards their workforces.

The following issues are some key points.

Fair pay practices

Although leaders who successfully and safely steer their companies and workforces through this crisis will continue to be valuable, it is important that senior management and Boards take a balanced approach to executive pay – particularly at a time when they are likely to be seeking more capital from investors, cutting dividends, or seeking support from the government. Remuneration Committees should think carefully about how they structure LTIPs so that the awards in future years reflect the experiences of shareholders during this time.

Capital structure and allocation

A misjudged approach to distributing a company’s financial resources – particularly during times of crisis – can contribute to corporate collapse. At a time when companies are looking for further support from government and investors, and when many are laying off or furloughing staff, long-term investors such as pension schemes should ensure that companies are taking the approach to capital allocation (including dividends, buybacks and how companies raise capital) that will best ensure the company’s long-term success or, indeed, survival as well as protecting shareholder rights.

Health and safety

Paying close attention in case of companies unfairly restricting paid sick leave, or failing to provide a safe working environment for their employees, is another consideration. Companies that have taken a proactive approach to safeguarding employee health, including mental health, are playing an important role, not only in terms of individual human safety but also in ensuring the future strength of the company itself.

Implications for reward and benefits directors

This has two implications for reward and benefits directors. First, if a workplace pension scheme takes a responsible investment or ESG approach, these factors will influence which businesses the scheme invests in. Your pension provider and/or its asset managers should be able to communicate how it makes these decisions and its expectations of investee companies. The PLSA’s 2020 Stewardship Guidance and Voting Guidelines describes the mechanisms schemes can use to make these decisions.

Second, employee wellbeing, and the strategies employers use to support it, are likely to be put under greater scrutiny in the future. Investors, including pension schemes, will pay closer attention to the way that companies treat their workforce and how this affects business’ long term performance.

Every crisis brings out both the best and the worst in companies, as it does in individuals. Although investors such as pension schemes must be pragmatic and flexible, the PLSA would encourage them to pay close attention to corporate behaviour – engaging where necessary and acting as good stewards of the assets, which members and employers have entrusted to their care.

The author is Caroline Escott, PLSA policy lead for investment & stewardship.

This article is provided by PLSA.