What about the “S” in ESG? – Transparency still lacking on remuneration

May 28, 2021

Transparency in reporting on social issues is a powerful way for businesses to build trust, create accountability, show leadership, and move the dial on seemingly indelible industry-wide issues. It is also a key factor for ESG investors who want to show alignment with increasingly stringent ESG regulations.

The EU regulations, or “SFDR”, for example, includes 16 mandatory social metrics regarding respect for human rights, anti-corruption, and anti-bribery matters. While the UK and US are still working towards their own versions of SFDR, it’s clear that the governance of Social issues is here to stay. It’s clear from the responsible investment disclosures of leading asset owners such as NEST, the National Employment Savings Trust, that investors are increasingly considering the reputational and operational risks of public reporting (and lack thereof) within their core investment risk-opportunity matrices.

While regulations are pushing ahead, investors depend on high quality data to take an informed view. In this second instalment of a three-part series, Áine Clarke of The Workforce Disclosure Initiative sheds some light on the latest developments in corporate transparency on social issues, based on the insights gleaned from their 2020 survey.

With hundreds of millions of people living in extreme poverty and almost half of humanity living on less than $5.50 a day, transparency around remuneration is essential. The increase of mandatory reporting requirements on gender /CEO median pay gaps will soon make it difficult for companies to hide huge disparities, but our findings suggest that more transparency does not necessarily equate to lower ratios.

While the number of companies disclosing CEO to median worker pay ratio increased from 48% in 2019 to 74% in 2020, there is no accompanying deceleration in the standard CEO remuneration. The top ten companies paid their CEO 200 times more than the median employee. The three companies with the highest CEO to median worker pay ratios all paid their CEOs over 500 times more than the median employee.

But many companies are making progress towards higher wage levels, with 71 per cent of companies saying they pay a living wage across their entire global operations, an increase from 55 per cent of companies in 2019. The level of corporate accountability on this issue varies by contract type: nearly half of companies did not explain how they are working to improve wages for workers who were not directly employed by the company, if not already paying the living wage.

This is problematic, not least because of the correlation between pay gaps and income inequality and in turn its effect on economic growth, educational and upward mobility opportunities, and wider political stability. For investors, equitable wage levels and pay gaps are vital signs that a company is creating an inclusive working environment and contributing to wider economic and income quality – developments which, in the long run, will reduce the reputational and political risks to their investments.

Now in its fifth annual cycle, WDI’s survey shows that no company is ‘there yet’ when it comes to reporting on the S of ESG. However, WDI survey participants are pioneering a model of corporate transparency that is head and shoulders above the rest, making almost 3 times as much data available than those who do not.  

There is still a lot of work to be done to improve workforce practices. While transparency in and of itself is only a first step, public information means knowledge sharing, mutual learning, and the improvement of business practices across the board, ultimately driving the provision of good work and fair wages globally.

For a more in depth look at the WDI 2020 survey findings please follow this link.

Last Updated: 28 May 2021