In the fourth part of our series on Solutions funds, I focus on Team Solutions' active ownership strategy. Undertaking positive dialogue around the issues of fair renumeration and board and management diversity supports our work aiming to contribute to a more sustainable future.
In Team Solutions we invest in companies that provide solutions to our global environmental and social challenges, primarily through their products and services, and thereby contribute to the achievement of UN Sustainable Development Goals (SDGs).
As companies develop, their shareholders and wider stakeholders also develop. The environment in which these companies operate is also evolving and companies should be prepared to reflect this. The SDGs represent clear goals that all United Nations member states adopted in 2015. The SDGs address global challenges such as poverty, inequality, climate change, environmental degradation, peace, and justice.
Because companies are an integral part of the community they operate in, they are key players in driving sustainable development and should aim to reflect the society we live in today.
There is consensus on the importance of good governance and transparency. According to Financial Reporting Council, "a company's should promote integrity and openness, value diversity, and be responsive to the views of shareholders and wider stakeholders."
Regulation also obligates companies to be transparent about their governance, based on the markets in which they operate. For example, the Corporate Sustainability Reporting Directive (CSRD) that requires large companies and listed companies in Europe to disclose information on what risks and opportunities they see on social and environmental issues, as well as the impact their activities have on people and the environment.
While Team Solutions' priority is companies' tangible contributions to succeeding with the SDGs, we expect our portfolio companies to execute good governance, as it can be a way to consider and manage risk as well as promote positive societal outcomes.
We use active ownership strategies in line with appropriate regulation like the SFDR to ensure that companies are contributing to a more sustainable future.
Focus areas
In the context of good governance, we focus on fair remuneration and board and management diversity.
We expect companies to execute fair remuneration practices, specifically with a focus on gender and racial pay gap issues and misaligned CEO pay. Despite increased discussion on wealth and income inequality, today only a few countries have legislation that call on publicly traded companies to disclose their pay ratios. Pay ratios vary significantly from region to region and country to country. The Nordics and several Asian countries have a lower pay difference ratio, whereas countries such as South Africa, India, US and the UK have among the highest.
Even though there is increasing attention to this issue, the method of disclosing this type of data is problematic because certain elements of the compensation package are often omitted.
Moreover, how CEOs are compared to "other" workers varies, as often the category of "other" can include both senior management and employees in lower income brackets. Our expectation is that companies employ best practice when reporting this type of data.
Meaningful progress has been made on narrowing the gender pay gap. However, there is still a long way to go at the global scale to narrow the gap even further among OECD countries.
According to an OECD report from 2021, one of the main reasons for wage inequality is the gap in wage-setting practices between firms as opposed to difference in workers' skills. Differences in tasks and responsibilities between gender are also one of the main reasons to why there is a wage gap between similarly skilled women and men.
However, the job to reduce the gender pay gap does not solely rest with companies. To tackle gender pay gap, policymakers should also make jobs more accessible for women, such as supporting women's careers throughout motherhood. The gender wage gap within and between firms can increase at an early stage of women's careers due to breaks from one's career after having a child. Policymakers can provide measures such as childcare, working-time flexibility, parental leave to address this particular set of challenges. (Reference: AllianceBernstein report, Zhihan Ma, May 25, 2021)
Dialogues with companies
We expect companies to execute fair remuneration policies and ensure board and management diversity across, but not limited to, gender, ethnicity, age, marital and parental background. As we operate with a global mandate, we will take each company's operational context into consideration when starting a dialogue with them. Since many topics have different levels of maturity in different regions, it is important to develop realistic expectations for our portfolio companies.
We conduct our review of companies on a regular basis, and when appropriate we start a dialogue. During our engagement we might consider one or more of the following topics:
- Limit executive compensation
- Report on pay disparity
- Link executive pay to sustainability metrics
- Limit gender and racial pay gap
- Board and management diversity
We view these as important topics to consider in our active ownership strategy because they reflect important socioeconomic enablers. These topics do not exclude other topics that we might deem relevant for active ownership. We recognise the absence or inadequacy of data in many of the challenges mentioned above, and we use best available practice when engaging with companies. We also recognise that improvement on these topics can be difficult to measure but we want to achieve the best possible outcome through our engagement.
Our focus on remuneration and board and management diversity seeks to ensure that we invest in companies that aim to have and keep a diverse workforce. Creating inclusive environments for different opinions and backgrounds to be heard is important. These topics are also selected because they reflect important topics within our investment strategy. We also experience an increasing demand from clients to address these issues directly with our portfolio holdings.
We focus on a positive dialogue with the companies in our portfolios. We believe that an improvement in these areas could benefit the company(ies) and our portfolios, as well as potentially creating positive societal outcomes.
Notes
The Sustainable Finance Disclosure Regulation (SFDR) is a transparency framework for financial market participants and financial advisers on how to communicate sustainability information to investors.
