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Lifting the Lid on D&I

Slowly but surely, companies are finally acquiescing to investor requests for more granular data on diversity and inclusion.

Barbadian singer Rhianna might not seem an obvious poster girl for the Principles for Responsible Investment (PRI), but her beauty company Fenty was highlighted in its recent diversity and inclusion report as an example of a company turning principles into profits.

The report states: “Within 40 days of the launch of Fenty Beauty, it generated US$100 million in sales. In response, several brands have broadened their offerings to serve a more diverse customer base. Some have called this the ‘Fenty Effect’.”

But the Fenty Effect is just one reason why many expect the S in ESG to take a prominent role in investment decisions in 2022 and beyond. The Covid-19 pandemic, the Black Lives Matters movement and persistent income inequalities have highlighted the need to address social risks and impacts. It is also increasingly apparent that many companies with robust diversity and inclusion strategies perform better than their more insular peers.

A recent S&P study found that in the US, “a modest increase in women in the workforce could add US$511 billion to GDP over the next ten years. Similar increases are possible in most developed economies”.

Meanwhile the pandemic demarcated those companies that invested in human capital from those that did not. The World Bank has since called on companies to ensure they put measures in place to protect for vulnerable workers.

Yet while there is an obvious need for diversity and inclusion data to help investors make informed decisions, this information is not always forthcoming.

Elena Espinoza, Senior Specialist, Human Rights and Social Issues at PRI, says: “Many companies are reluctant to offer this data publicly because it can paint an unfavourable picture. Even if you have an inclusive workplace, especially if you’re at the beginning of the journey, the company’s numbers might not look as good as they or their investors would like.”

Simultaneously, employees may feel uncomfortable sharing certain kinds of personal data with their employer.

“Companies feel that these can be intrusive questions to ask. Some employees are nervous about how the data might be used. It is up to companies to reassure their people about data protection, but it is also telling if employees don’t feel able to trust their employer,” Espinoza adds.

Making it public

While investors may find workplace data hard to come by, it does exist. In the US, companies with more than 100 employees are obliged to provide EEO-1 Component report to the Equal Employment Opportunities Commission annually. The report includes data by race/ethnicity, sex and job categories and offers an insight into not only who is employed but at what pay grade.

John Wilson, Director of Corporate Engagement at Calvert Research and Management, says that while the EEO-1 data is limited to US companies it is an important tool for investors assessing companies’ performance.

“The EEO-1 is vital for measuring diversity. It breaks down ethnic data in a granular way, which is important because a lot of companies when they report ethnicity use a euphemism for ‘not white’, which normalises whiteness and does not give us the data we need. The data is also granular when it comes to the job classifications so we can understand diversity and seniority.”

The issue, however, remains in its availability. While companies are compelled to make their diversity strategies publicly available, the same is not true of EEO-1 data.

This data gap has driven leading institutional shareholders to action.

In December 2020 the New York City Comptroller Scott Stringer sent letters to CEOs of the S&P 100 on behalf of the New York City Teachers’ Retirement System, the New York City Employees’ Retirement System, and the New York City Board of Education Retirement System, demanding they release EEO-1 data.

According to Stringer, “Publicly disclosing the demographics of employees by race, gender, and ethnicity – including and most notably those in leadership and senior management positions – will provide critical information for shareowners to better understand workforce practices, identify areas for improvement, and benchmark diversity performance.”

However, such demands have not been met with universal acquiescence.

Calvert made similar requests of the top 100 companies, and as of October 2021, received responses from three quarters of firms, while 62 have newly agreed to release the data.

Yijia Chen, Vice President, Applied Responsible Investment Solutions at Calvert, says this figure has now risen to more than 80 companies, reflecting corporate appreciation that investors will no longer tolerate being stonewalled.

“Companies realise they couldn’t justify not providing the information because they heard concerns from so many shareholders,” says Chen, who notes that Calvert needed to reassure some firms on how the data would be used.

Patchy disclosure

Looking outside the US, Charlotte Lush, Research Manager in the Workforce Disclosure Initiative (WDI) team at sustainable investment NGO ShareAction, says availability of diversity and inclusion data is similarly scarce.

Investors are, she says, reliant on disclosure regulations that vary across jurisdictions, and these may not cover the data asset owners need.

Lush says: “Current disclosure is extremely patchy and is often shaped by national regulations such as the mandated gender pay gap reporting in the UK. The focus tends to be on particular metrics and indicators, such as board composition, which are touted as being emblematic of diversity across a company. Unfortunately, these can be of limited usefulness when it comes to getting a genuine understanding of how diversity and inclusion is actually being approached throughout an organisation.”

The ShareAction Workforce Disclosure Initiative – formed by a coalition of 68 institutions, with US$10 trillion in assets under management – gathers diversity and inclusion data which signatories can “integrate into their investment analysis, and practical insights on how to address pressing workforce issues”.

Last year, 173 global companies competed the WDI survey. In addition to questions on workforce composition and pay, the survey includes sections on worker representation, supply chain conditions and grievance mechanisms.

“The extensive nature of the WDI survey means that responding companies generate significantly more data through the survey than they traditionally publish,” says Lush. “Responding companies made over three times as much data available through the WDI compared to traditional annual and sustainability reports.”

Lush expects mandatory disclosure under the EU’s Corporate Sustainability Reporting Directive and potentially the disclosure standards being developed by International Sustainability Standards Board to drive greater engagement with the WDI, but emphasises the need for granularity.

“It is essential that mandatory measures are comprehensive enough on diversity and inclusion to be able to offer a genuine insight into how companies treat their workers. Narrow approaches that don’t cover the full scope of the workforce and don’t recognise the complex and multifaceted ways diversity and inclusion issues play out in companies, will fail to give investors the data they need to be meaningfully understand these issues.”

Comparable data

Understanding diversity and inclusion also requires a mechanism for comparing companies on a like-for-like basis, and there has been some growth in indexes to help investors compare performance across their portfolios.

The Refinitv diversity and inclusion index covers 9,000 companies looking at 24 metrics across the four pillars of diversity inclusion; people development; and news and controversies.

The firm’s most recent index report found the spread of financial returns between those companies in the top and bottom deciles for diversity and inclusion is considerable. In 2019 those in the top decile reported returns of 21.97% while the bottom reported just 15.82%. this was against 21.18% from the MSCI All Companies World Index equal weight benchmark.

To illustrate differences in performance, Refinitv created two portfolios; one comprising companies with 90% board cultural diversity, the other with just 10%. When comparing performance over over five years, the more diverse portfolio returned 138.2% versus 79.53% from its less diverse counterpart.

However, Elena Philipova Head of ESG Proposition, Refinitiv, says too much diversity and inclusion focuses on gender while “background, ethnicity, sexual orientation and people with disabilities either get lumped together or receive no mention at all”.

She says: “This needs to change, and we will play a role in raising awareness and influencing companies to be more transparent across the various topics in scope of diversity and inclusion.”

The PRI says it will also do more to help investors meet their diversity and inclusion stewardship responsibilities. It will also “support increased data availability from companies and investors to define key outcomes and indicators for data collection and allow country-level comparison” and “support standardisation efforts in the development of [due diligence questionnaires] to aid asset owners to include [diversity and inclusion] in the selection, appointment and monitoring of managers”.

It is already becoming increasingly difficult for companies to avoid publishing their diversity and inclusion data; the next important step is making sure investors are able to analyse that data effectively.

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