As the public consciousness increasingly prioritizes responsible business practices, the use of environmental, social and governance (ESG) as a standard for measuring corporate performance has increased rapidly within the investment ecosystem. Many institutional investors are beginning to include ESG considerations in their investment strategies. As a result, Diversity and Inclusion, a component of the social pillar of ESG, has garnered a lot of attention.
Diversity and Inclusion, also known as D&I, programs are growing in importance for companies that want to perform well on ESG measures. In this blog, we outline the case for integrating D&I into ESG frameworks, examine what types of challenges this may pose for investors, and discuss practical ways firms can implement D&I into their ESG strategy.
Diversity and Inclusion: An Introduction
Diversity and inclusion encompasses a range of social, cultural and economic factors. When considering D&I, it’s important to consider elements such as gender, age, race, religion, sexual orientation, among others. D&I is used to measure how inclusive an organization is by identifying any biases or negative stereotypes that may exist within the workplace. Since a diverse workforce can increase productivity, creativity and revenue, it’s imperative for investors to have a good overview of these key factors when evaluating companies.
Challenges for Investors
The biggest challenge that investors and companies face in evaluating D&I is measuring the performance of D&I initiatives and the credibility of the reported data. Since social issues are not always tangible and may fluctuate from time to time depending on perceptions and attitudes, it is quite tricky to decide on the indicators or metrics to use to understand the impact of D&I initiatives.
Additionally, there is an absence of standard D&I measurement guidelines. As with differences between the U.S. SEC and the EU SFDR ESG standards, there are also differences between how the SEC and SFDR handle D&I.
Differences in understanding and awareness of D&I across organizations can also impact the transparency and measurement of key performance metrics. For instance, D&I initiatives are often tracked by HR, if at all, and therefore may not be conveyed accurately to investors and regulators. This makes the standardization of ESG reporting across industries vital to ensure more accurate comparisons and insights.
Incorporating D&I in Your ESG Strategy
When considering how to include D&I in your ESG strategy, it is important to understand that the goal is to evaluate the company’s current D&I initiatives and continuous progress on this front. This includes making a judgment based on voluntary disclosures, analyzing respective D&I programs, and benchmarking results with industry peers. Defining a set of relevant metrics at the intersection of ESG reporting and D&I can be crucial for investors as well as companies. Some of these metrics include:
- Diversity across organizational levels
- Candidate demographics
- Pay equity
- Retention across employee groups
- Employee advancement rate
- Grievances and lawsuits
Tracking impact and progress in these key D&I areas can help investors make a more informed evaluation of the “social” pillar of their ESG investments and ultimately help them deliver improved results.
While each dimension of ESG plays an important role in aligning business strategy with social impact, they each demand different approaches to implementation. Investors are paying more attention than ever before to how companies manage D&I as part of their ESG reporting practices. With a growing number of asset managers asking firms to disclose their ESG goals and strategies, it wouldn’t be surprising to see D&I playing a more integral role in the ESG investment decision-making process in the years to come.
How IVP can help
IVP ESG Management is strongly positioned to help asset managers establish a reliable framework for ESG investing that supports accurate and efficient portfolio construction, asset allocation, risk management and compliance, and regulatory reporting. The platform can be utilized by asset managers to effectively source, manage and use ESG data, including data regarding D&I.
An ESG platform that helps asset managers implement an ESG framework, perform ESG data management, align with global mandates, and streamline disclosures.
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