The Investment Association (IA) has released their Shareholder Priorities for 2023. In this blog, we take a look at the IA’s four Shareholder Priorities, drawing on key takeaways from the Association’s findings and where we expect to see developments in reporting moving forward. Along the way we will outline how Design Portfolio, and our in-house impact consultancy Ever Sustainable, can help implement the developments across these four key areas.
Who is the IA and what are their critical value drivers?
The IA is the trade body and industry voice for UK investment managers.
Our mission is to make investment better. Better for clients, so they achieve their financial goals. Better for companies, so they get the capital they need to grow. And better for the economy, so everyone prospers.
In 2020, the IA set out four Shareholder Priorities which the IA members had identified as critical drivers of long-term value for companies. Investors argue those drivers are not limited to share price or dividend yield and encourage a more holistic approach to stewardship, expecting companies to be cognisant of a wide range of material issues.
The agreed theory is if proactively managed, material issues, including environmental, social and governance issues, can lead to the long-term returns investors seek. Using environmental issues as an example, the IA highlights how managing climate-related risks can actually provide value-add opportunities.
The four identified critical drivers of long-term value are:
- Responding to climate change
- Audit quality
- Diversity
- Stakeholder voice
What are the priorities for 2023?
The priorities still remain the same this year, with the IA detailing findings and future expectations across each area. The IA reviewed 276 FTSE All Share and FTSE Fledging companies to do this.
Overall, investors have been pleased with the companies' progress in responding to these four issues. We can see this in line with how corporate reporting has developed since 2020. That being said, the economic and geopolitical landscape has significantly evolved over the last twelve months, forging some critical challenges and issues for businesses to consider.
Let’s now delve into the four specific priorities. We will draw on key takeaways, where we expect to see reporting developments and how we can help.
Improving climate change disclosure
Reporting has naturally progressed in this area due to the new rules making disclosure mandatory, but investors found the following:
- whilst most companies describe their material climate-related risks and opportunities, fewer disclosed the impact on the company strategy;
- they wanted to see further development around climate-related metrics and targets, particularly:
- the frameworks and methodologies used for setting targets and measuring progress;
- the targets which have been set over the short, medium, and long term; and
- the progress against targets to date and explaining whether it is in line with expectations;
- more information on scenario analysis and how this affects financial planning and strategy; and
- the directors’ consideration and assessment of climate and transition-related risk when signing off the accounts.
Our in-house impact consultancy, Ever Sustainable, frequently supports companies in running scenario analysis programmes and adapting their business model and strategy as a result. We encourage companies to communicate how outcomes are weaved into capital allocation strategies and how they will innovate across the supply chain responding to climate-related risks and opportunities. See Renew’s 2022 annual report for an example of where we helped incorporate the consideration of climate-related risks into the strategic and financial planning processes. It also incorporates a lot of the wanted developments above, from outlining methodologies to detailed scenario analysis, making Renew a leading AIM-listed TCFD reporter.
On the back of the IA’s findings, we are excited to see the evolution of the “Sector-neutral framework” being developed by the Transition Plan Taskforce, who are looking to standardise reporting in this space.
Audit quality
The IA found only 8% of FTSE 100 companies adequately demonstrated how they had assessed the quality of the audit, including how the auditor demonstrated professional scepticism and challenged management’s assumptions where necessary.
To help assess the quality of the audit, the IA recommends breaking the question into three parts:
- how the audit committee has assessed the quality of the audit;
- how the auditor has demonstrated professional scepticism; and
- how the auditor has challenged management’s assumptions where necessary.
We believe this could be elevated in a case study, linked to reappointment and/or covered through a Q&A in audit committee reports. If pulled out into a flow chart or similar diagram, the audit committee could comment on each step of the audit process, helping to break the assessment into understandable chunks and provide clarity on the focus areas of the external audit review. A great example can be found in Victrex’s 2022 annual report. We helped design a step-by-step flow chart demonstrating how the effectiveness of the external audit is assessed, documenting clear outcomes and actions taken towards specific issues.
Clarity on diversity
Change has been welcomed in this area following the FCA’s Listing Rules to incorporate additional diversity reporting and diversity targets. Again, investors are pleased with the progress made to diversify boards. However, investors want to see companies strive for equality, diversity and inclusion (ED&I) across the wider workforce, not just on the board, in line with new FCA rules and additional diversity reporting.
We expect to see these developments reported via sustainability strategies and then across gender/ethnic/diversity pay gap reporting. An example can be found in the sustainability section of Britvic’s 2022 annual report. We helped Britvic to communicate their gender and ethnicity pay gap data in their ARA, enabling the business to identify actions to support progression and increase the representation of these stakeholder groups. Britvic outlines their findings, commitments, achievements and future focuses, and any data is pulled out in an engaging manner, with comparisons and progress which are easy to understand across various infographics.
Stakeholder engagement
Investors are still expecting companies to report stakeholders' material issues, engagement mechanisms and how their views are considered and impact board decision making, as we have been seeing across reports for a number of years now. Alongside good practice, investors were also pleased with companies' approaches to managing their stakeholders through the COVID-19 pandemic.
We expect to see the cost-of-living crisis under the spotlight moving forward. Disclosures could explore the impact of economic inflationary pressures on employees, customers and suppliers and how companies are supporting and communicating with these stakeholders through the crisis. Balfour Beatty’s 2020 annual report demonstrates how a company can report on its response to a crisis, particularly around engaging with and supporting employees. Pull outs were used to help document the strategy and methods of engagement, supported by QR codes to link readers to the website for more detailed case studies and video content.
These disclosures have the potential to spread to other areas of reporting, from the marketplace to the strategy and principal risks. A company’s engagement with stakeholders, particularly in times of crisis, links to reputational risk, underlining the importance of best practice and transparent reporting in this area. For inspiration, see our recent blog that examines the developments we expect to see in stakeholder reporting throughout 2023.
Are you in need of support?
At Design Portfolio and within our impact sustainability consultancy, Ever Sustainable, we continue to support our clients across these four areas, from scenario analysis to ED&I strategies and improved corporate communications.
To find out more, get in touch at hello@design-portfolio.co.uk