Monday 20 June 2016

Inequality, human capital and investors

I've blogged before about the obvious weakness on the S in ESG. I'm someone who has come to responsible investment with a labour movement background and I have been frequently disappointed by how little attention labour issues get.

It isn't like these issues aren't in the public domain. Economic inequality - both within firms and across countries - has become the focus of renewed policy interest. Perhaps most significant is that the economic argument has shifted towards the position that inequality can be drag on economic performance. And, I will repeat forever, increased inequality correlates with declining union density and collective bargaining.

Yet it has seemed that the RI community is far more comfortable talking about corporate governance or climate change than the people outside the boardroom who create value for companies and their investors, and how they are treated and paid. This seems odd, given the emphasis on 'materiality' in RI, since employee engagement and productivity must surely be important to pretty much all businesses, regardless of sector.

Finally, however, things have started to shift. In the past few months I've seen several reports that look at the issue of inequality from an investment perspective. This is being looked at both in terms of inequality at the level of the economy - in response to evidence that inequality may be a drag on performance - and at the level at the firm. For example, MSCI published a paper looking at pay gaps within firms, and found that larger pay gaps were correlated with poorer performance. And a research paper from Kepler Cheuvreux that came out earlier this year takes a very thorough look at inequality and sketches out an engagement approach.

In the field of executive pay, we finally seem to be leaving behind the damaging idea that what really matters is structure, not scale. First, there has been an intellectual shift against extensive performance-related pay - some think it's flawed on behavioural grounds, others think it creates too much complexity, or a bit of both. So there is a lack of appetite for yet another round of structural reform. Secondly, the issue of scale is now a topic of polite corporate governance conversation. We are seeing cases where pay policies that are "structurally sound" but are felt to pay out too much money being challenged.

And finally, human capital management (hate the phrase, but investors seem to like it) has also started to gain greater attention. Both the Investment Association and the PLSA have projects that look at this in one way or another. There are at least two other initiatives I am aware of underway.

This stuff doesn't go as far as many of us would like, and it is often argued in ways that make us a bit uncomfortable, but the fact that research and activity of this type is taking place is a step forward. None of this will necessarily go anywhere, that depends on what use we make of the opportunities, but it does feel like there is acknowledgement of the importance of actual human beings, finally.

Thinking positively, I remember when the IIGCC was set up and, before that, when USS commissioned a report from Mark Mansley on climate change as an issue for investors. Back then, these things felt like they were on the periphery. Now climate change is taken seriously by a wide range of financial institutions, and even conservative houses back shareholder resolutions on the topic.

Perhaps a concerted effort to raise awareness of the importance of the people that actually work for the businesses that our capital is invested in can achieve something similar. Here's hoping.