New research identifies gaps in frameworks measuring corporate performance.
There is little consensus about how companies’ performance on diversity, equity and inclusion (DEI) should be measured and assessed by stakeholders, according to new research.
Rights CoLab, an organisation aiming to advance human rights by collaborating across civil society, technology, business and finance, analysed reporting metrics and frameworks developed by 21 organisations to identify commonalities in their understanding of DEI and the differences in measuring key themes.
These include the Global Reporting Initiative’s general disclosure, diversity and equal opportunity and non-discrimination frameworks, Refinitiv’s D&I ratings, and ShareAction’s Workforce Disclosure Initiative.
“Investors, and the corporations they invest in, increasingly want to do a better job of advancing DEI. But there is much confusion among investors, companies, and standard setters about how to measure performance toward these goals,” the report said.
The assessed DEI-labelled metrics were sorted into 12 themes, including pay equity, strategy and governance, worker voice and protection, and supply chain. Rights CoLab then identified how these themes are measured, and where there are gaps.
The frameworks predominantly placed an emphasis on quantitative metrics, the report noted, but these are not typically accompanied by targets outlining what progress is needed by companies. Gender and race/ethnicity categories of workforce representation were most common across the frameworks, but there “is less consistency in recognising age, disability, sexual orientation, nationality and other less visible characteristics”, Rights CoLab said.
Further, just three out of the 21 frameworks include a metric assessing DEI in relation to contractors, part-time or temporary workers. “Of these, just two call for disaggregation by gender, and none disaggregate by other marginalised groups,” the report added.
A recent report by the World Benchmarking Alliance noted that poor corporate governance performance and disclosure is having a knock-on effect on social equity, with just 1% of 1,000 of the world’s largest companies performing acceptably against its 18 core social indicators.
Research by Pensions and Investments Research Consultants (PIRC) also highlighted the widespread use of “questionable” employee data to justify corporate executive bonuses.
The importance of DEI-related issues to asset owners was underlined this week when Norges Bank Investment Management (NBIM), which manages Norway’s sovereign wealth fund, published its expectations for investee companies.
“With DEI occupying such a significant place in the market, investors and other stakeholders need consistency in how the term is being used in order to know whether companies are effectively addressing what they say they are, and whether there are critical gaps in their efforts,” Rights CoLab said.
Steps are being taken in multiple jurisdictions to increase investor awareness and management of social risks, improve the quality of social-related reporting from companies and define socially sustainable economic activities.
The UK’s Department for Work and Pensions recently launched a taskforce that aims to guide pension schemes in their understanding and disclosure of social-related investment risks, identifying reliable data and metrics providing clear insight of social risks. The taskforce will be a minister-led and cross-department working group. Financial regulators have also been invited to join.
The European Commission is also currently considering a final draft social taxonomy that has been put forward by its Platform for Sustainable Finance. The social taxonomy will be integrated with existing European sustainable finance legislation to minimise regulatory burdens and will ultimately provide investors with a classification system outlining which economic activities and are socially sustainable.
Rights CoLab said: “Investors themselves are fully aware of the problem. While many existing frameworks focus on the more easily measurable ‘E’ and ‘G’ factors, investors say that the social pillar of ESG remains the most difficult to assess and incorporate into investment analysis. To be more effective, the field – and the metrics – need to evolve.”
