Could Adding A Letter To ESG Shine A Brighter Light On Diversity?
With nearly a quarter of all new capital invested into US stock and bond funds in the last year flowing into sustainable funds, the focus on the definition and metrics behind these environmental, social, and governance (ESG) investments is under more scrutiny than ever. As a long-time impact investor, I am heartened to see the growing recognition that measurement and transparency are critical to the long-term success of values-aligned investing. Today, with more attention than ever on this space, we have a unique opportunity to more clearly shine a light on some of the key categories underlying ESG and ensure the terms match the needs of the market.
Of particular concern is the lack of clarity that ESG scores provide when a company is strong in certain ESG characteristics yet falls short in others. I can’t tell you the number of times I’ve looked at an investment opportunity that has a strong ESG score and looks good at the outset due to its strong environmental credentials, yet falls short when I look into the diversity of its leadership team. As investors' interest in clear and relevant diversity data continues to soar alongside the growing evidence of the economic advantages of diverse teams, perhaps the time has come to consider adding one more letter — the letter D — to ESG to give diversity the focus and measurement it deserves.
How could adding a letter actually advance the measurement and reporting of diversity? There are a number of different factors, including customer satisfaction, business ethics, supply chain management, data protection and privacy, occupational health and safety factors and … diversity and inclusion included under the “S” umbrella right now. That’s a lot to cover under one category. And since companies often get credit for being transparent or making progress in any one of these areas, a company that puts a strong emphasis on occupational safety and strong supply chain management may score high on the “S” even if their diversity numbers are dismal. Additionally, many report board diversity under the “G” for governance, which covers a broad range of disclosures and data, including board and management structures, auditing and compliance practices, as well as company’s general policies and standards. It’s easy to see how board diversity data can get buried.
By separating diversity into a distinct category of measurement, the data about the number of women and people of color employed across the company and in key decision-making roles that investors — especially the next generation of investors — are looking for would be more readily transparent and would gain greater weight in overall ESGD scores. And while there aren’t yet clear standards for diversity against which a company’s status or progress could be measured, raising this item in prominence would give further impetus to disclosure of key data. One example to consider is the EEO-1 diversity data that large companies already share annually on a confidential basis with the US Equal Employment Opportunity Commission (EEOC).
A wide range of companies are already embracing this ethos by sharing key employee demographic data on race, place, and gender metrics. This can be seen in a number of ways, from following the lead of companies like PayPal and Bank of America by reporting on the impact of the DEI commitments they made in 2020 to publishing their EEOC data annually. In fact, last year, 37 of the 100 largest US companies disclosed the diversity data they are providing to the EEOC, and 31 more top US companies have pledged to disclose this data in the near future. JUST Capital also reports more than 80% of the country’s 100-largest employers disclosed the racial and ethnic composition of their boards of directors or board nominees in 2020, marking a significant jump from previous years.
As more companies embrace the growing body of research that suggests diversity leads to outperformance in stock performance, profits and in building a more innovative culture, there is a clear opportunity to drive a concise and standardized “D” metric to power ESGD. Whether EEOC data or other disclosures come to the forefront, companies and investors should welcome the addition of ESGD to their vocabulary, as it would serve as a valuable tool investors, employees, and the public could use to measure and support companies that understand the business benefits of diverse teams and who are taking real action to attract and retain a more diverse workforce.