Ethical Screening Expand Board Diversity Criteria

April 27 2023 - Matthew Ayres, Operations Director

New rules for listed companies on diversity reporting and board targets have been introduced by the FCA, which will work on a comply or explain basis. Whilst these came into effect in 2022, the new disclosure requirements apply for financial years beginning on or after 1 April 2022, so we expect to see increased disclosures meeting these new rules in financial reports from Q2 2023.

Companies can choose their own reference date against which to make the disclosures, so the FCA envisaged collection and reporting the new data would begin earlier than the final rules require.

To take account of the new requirements, Ethical Screening has been working on further developing our current Board Diversity criteria, following our ESG Developments meeting last month. As a result, we have decided to expand the Board Diversity component of our governance score (which focused mainly on gender) to cover the three new requirements. In order to score in this area, the company needs to demonstrate it has achieved at least two of the three new requirements.

The details of the requirements are shown below:

Needs at least 2 out of the following 3 to score positively for board diversity:

  • Transparent diversity policy in place for the board with at least goal of 40% women (or already has over 40% women on the board).
  • At least one senior board position (Chair, Chief Executive Officer, Senior Independent Director or Chief Financial Officer) is held by a woman.
  • At least one board member is from a minority ethnic background, defined by reference to the categories recommended by the Office for National Statistics, excluding those listed as coming from a White ethnic background

We will only record information on ethnicity if the company has disclosed this itself (we have taken the decision not to guess, or assume, the ethnicity of board members).

The new listing requirements align with the updated gender diversity targets set by the FTSE Women Leaders Review on 22 February 2022 and the ethnic diversity target set by the Parker Review in October 2017. The requirements will be reviewed by the FCA in three years’ time.

When scoring companies, we, of course, need to be mindful that not all countries apply the same rules, particularly in this area. This is one of the reasons why we do not score all three requirements, as we feel this would bias the outcome toward UK listed companies where the rules have been initially implemented.

In the US, NASDAQ rules are similar and are, also, on a comply or explain basis. They require each listed company to disclose whether they had at least one director who identified as a woman and at least one director who identified as either an underrepresented minority or a member of the LGBTQ+ community. The 'explain' part comes into effect over 4 years ending in 2025. The EU is, perhaps unusually, not leading the way in this CSR area, but does have similar requirements in the pipeline for 40% of non-executive director positions to be held by women by 2026, although non-gender related diversity requirements are lacking in this and most other markets.

At Ethical Screening, we are proactive in ensuring that our analysis and scoring methodology are flexible enough to take account of such variations, using the expertise and knowledge of our research team.

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