US Investors Urged to Dig Deeper on D&I

Company disclosures insufficient to assess effectiveness of policies and initiatives aimed at greater equity.

As investors in the US increasingly raise questions about the diversity and inclusion (D&I) performance of investee companies, the focus is shifting towards putting “meat on the bones” of the pledges of transparency and action. Disclosures on diversity and anti-discrimination initiatives may be on the rise, but so too are controversies related to race and ethnicity, as well as pressures for regulatory intervention.

According to research by ESG and corporate governance research, ratings and analysis firm Sustainalytics, investors need to undertake D&I risk analysis that “goes beyond company disclosures alone”.

Sustainalytics’ new report warned that companies need to do more to manage concerns about racial and ethnic equity, not only by disclosing stronger programmes and policies, but also by ensuring that these initiatives mitigate related risks and controversies.

The company examined 3,343 firms from the Morningstar Global Markets Large-Mid Index, finding that only 15% disclosed diversity initiatives went beyond legal compliance. Controversies in the US related to race and ethnicity in 2020 included 288 incidents involving 130 firms listed on the Index. Firms with incidents tended to disclose more diversity and anti-discrimination initiatives, highlighting the need, said Sustainalytics, for more stringent risk analysis.

The financial sector is highly exposed to societal incidents (those related to race or ethnicity that stem from a company’s products or services and their impact on people within the communities they serve) due to institutional financing of projects affecting Indigenous communities and other underrepresented ethnic groups, said the report.

Racial equity audits

In a recent article, Kori Hale, CEO of digital news platform CultureBanx, pointed out that some of Wall Street’s largest banks had asked their shareholders to reject racial equity audits. Such audits provide recommendations on internal policies, external communications, and organisational practices as they pertain to goals of racial equity for a company.

In the wake of the murder of George Floyd in June 2020, SOC Investment Group wrote to shareholders of systemically important financial institutions, urging them to support the Group’s proposal that boards conduct racial equity audits that would analyse each bank’s impact on non-white stakeholders and communities.

The Group describes racial equity audits as “the only way” that shareholders can be confident that a company’s actions are contributing to its stated D&I goals effectively.

“Elevating social justice and racial equity is a critical issue affecting financial companies, or so they claim while refusing to engage in a comprehensive, organisation-wide transparent audit,” wrote Hale.

Bucking the trend, investment firm BlackRock announced in April that it will conduct and publish the results of an external review of how its diversity, equity and inclusion policies affect stakeholders.

Acting on behalf on institutional investors, major asset managers increasingly want corporate boards to show they are responding with substance to everything from climate change to diversity and human rights, according to shareholder action group As You Sow, which co-published the Proxy Preview 2021, earlier this year.

Michael Passoff, CEO of Proxy Impact and co-author of the report, said shareholders were raising questions about how companies should respond to the Black Lives Matter (BLM) movement. Twice as many proposals about diversity had been filed for the 2021 proxy season compared to 2020.

“Companies were quick to highlight their efforts during the BLM demonstrations over the summer, but proponents want to see proof these commitments have real impact,” said the Preview. “All but two of the companies facing these proposals are doing so for the first time.”

Regulatory agenda

Regulatory attention to the reporting of D&I metrics is increasing, but the introduction of new rules is not imminent. In June, the Securities and Exchange Commission (SEC) released its Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions. Proposed final SEC rulemaking areas include disclosure related to workforce and corporate board diversity.

In a recent speech on moving towards a more prescriptive ESG disclosure regime, SEC Commissioner Hester Peirce highlighted the challenges of creating such a framework. “As more issuers and asset managers are grasping for the ESG label, they likely will press to expand the number of topics further to make it easier for them to justify calling themselves ESG,” said Pierce, who has frequently asserted her scepticism on the need for additional reporting requirements. “However, the broader the issue set gets, the more difficult for the SEC to prescribe precise ESG rules.”

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