How gender pay gap data is being used in investor engagement

It has been four months since the first statutorily required gender pay gap figures were disclosed by companies across the UK.

With all firms employing more than 250 members of staff mandated to provide a range of figures, more than 10,500 companies took part in probably the country's largest disclosure project.

The reporting covered a range of data: hourly and bonus pay gaps, both on median and mean bases; the proportion of bonus recipients by sex; and the make-up of pay quartiles by sex.

For many investors, these figures are providing insight into the 'social' aspect for environmental, social and governance (ESG) investing, but the lengths to which they are incorporated into investment decision-making varies.

The data

Upon publication of the first round of data in April, Professional Pensions analysed the figures of more than 100 pensions-related firms, finding huge differences in some sectors - notably investment and law - on at least the median pay figure.

Yet high figures are not isolated to these sectors, and household names have reported significant gaps. For example, Apple UK had a 24% median gap, while Ryanair revealed a 72% difference. Put simply, this means, on average, women earned 76p and 28p respectively per £1 a man earned. At around three-quarters of all firms that reported, on a median basis, men earned more than women.

Conversely, again on the median basis, the National Farmers Union had a negative gap (i.e. women were paid more than men) of 51.6%, while international publishing house Macmillan recorded a negative gap of 34%.

However, the data does not show where a female worker may be being paid less than a male worker doing the same job. Nevertheless, both ends of this spectrum can be used by investors to inform their engagement with investee companies.

MSCI equity research analyst Guido Giese says this kind of data is incorporated into the ESG ratings it makes of companies, alongside numerous other factors.

"We provide gender diversity data and that helps asset owners in the process of directing their voting engagement towards issues," he says. "We have a huge team of roughly 200 analysts that go through all the data that we can get from the annual report and also documents that are public and companies submit to regulators."

All-in-all, the index provider uses 37 factors for its ratings, although which factors it applies depends on the industry it is analysing. It looks at between nine and 12 factors for each company depending on where the risk exposure may be most prevalent.

"However, corporate governance is always there and always researched for all the companies," he continues. "Both 'E' and 'S' topics are researched for those industries where our analysts come to the conclusion that these kind of risks can have a significant impact on the share price."

Engagement

Kempen Capital Management takes a similar approach in some respects, with its engagement with companies on this issue decided on a case-by-case basis.

Its head of sustainability Karen McGrath explains that, while the data has been useful, its usage for engagement very much depends on the companies it is talking to.

"Obviously, we have looked into them closely, and we can pretty much identify that all sectors have a pay gap but what we tend to do is look at each company case by case so we will drill down into the data," she explains.

"We don't necessarily look at the broader picture as it's definitely a case-by-case basis, but we do welcome the disclosures and we do think it assists us in dialogue with companies."

Furthermore, the type of its investment funds can impact the level of engagement. Within its sustainable European small-cap fund, Kempen says it is conscious it does not want to place too high a burden on investee companies. The fund's manager Tommy Bryson says he is "mindful that the issues have to be material" before it presses for action.

Yet the Local Authority Pension Fund Forum (LAPFF), which aims to promote the interests of 77 local authority pension funds with around £230bn of assets, takes a more direct approach to using the figures in engagement. Paul Hunter, engagement services consultant at the forum's engagement partner Pension & Investment Research Consultants (PIRC), explains:

"It speaks to the issues around pipeline of candidates and gives an indicator of how seriously companies are taking the issue, especially when you're looking across the sector."

For example, companies cannot rely on stating there is a limited pool of talent when other companies have narrower pay gaps, he says.

"We are using this as part of our wider data but, from time to time, we will use it specifically. If we think there's a particular issue then we will engage with the company and we will raise the issue. Obviously, this is fairly new information, so we will probably be doing so more in the future."

Further disclosure

Earlier this year, the government announced plans to require firms with more than 250 employees to report the pay ratio between the highest paid member of staff and the median pay of the remainder of staff.

This will likely highlight the huge gaps that can be experienced, as well as what some might see excessive bonuses, namely that of Persimmon chief executive Jeff Fairburn, who was granted a bonus of £75m this year, although this was initially pegged at £100m.

And some firms - for example, PwC, EY, and ITN - are reporting on the pay gap between white staff and black, Asian and minority ethnic (BAME) staff, without yet being required to do so.

Investors are increasingly seeking for companies to disclose this broader range of information. McGrath notes that Kempen actively asks for data on a large set of differentiators.

"We also use questionnaires that purely focus on ESG. Within that, we do ask key questions about diversity and board diversity, but not only gender diversity; obviously age, nationality, and education, and we also have a section on chief executive to worker pay ratios and women on the executive board."

And it is this kind of data that the LAPFF says it will use as it is released, Hunter says.

"We'll definitely be using the [chief-executive-to-worker pay] information to engage companies again on the same kind of issues around making sure that they're valuing their workforce and making the most out of the talent that's within those companies.

"The forum definitely thinks that there should be more disclosure around issues around the workforce and indicators of diversity, but also around how engaged the workforce is within the company."

ShareAction has been pushing for greater disclosures from investee companies across the world, in a bid to "drive a race to the top". Now in its second year, the Workforce Disclosure Initiative (WDI) targets firms such as Apple, Louis Vuitton and Tesla.

This year, over 100 investors representing $12trn (£9.3trn) assets under management have contacted more than 500 companies, selected based on their market capitalisation, significance within their sector, and size of their workforce.

Investor engagement officer James Coldwell says: "We would argue that companies that are ahead of the curve on all these issues, in the long-run, will outperform those organisations that only follow legislation and are the last ones to the party. A long-term ambition is that companies will be disclosing this type of information as standard, and that doesn't necessarily have to be driven by national governments passing new legislation."

Hoping to hear back by 22 October, the initiative seeks to understand company key performance indicators relating to areas such as governance and human rights, risks and opportunities, and supply chains.

Coldwell continues: "There's been a real lack of data on workforce issues and you regularly hear investors talking about the missing 'S' of ESG. The WDI absolutely wants to be the platform to fill that gap and the level of interest we've received from investors demonstrates that they are taking the 'S' much more seriously today."

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• Topics
• Investment
• Gender pay gap
• gender equality
• diversity
• LAPFF
• Local Authority Pension Fund Forum (LAPFF)
• MSCI
• Guido Giese
• Kempen Capital Management
• Karen McGrath
• PIRC
• Pension and Investment Research Consultants
• ShareAction
• James Coldwell
• Workforce Disclosure Initiative
• WDI
• Tommy Bryson
• Paul Hunter
• HR