Companies and DEI Today
In recent years, companies have increased transparency around DEI data – chiefly through company goals around improving diversity and inclusion to keep up with investor demands. Investor demand for this information has increased, in part, by societal awakenings such as the Black Lives Matter Movement, as well as research that’s made a strong fiscal case for gender, ethnic, and cultural diversity in the workplace leading to more profitable companies.
For example, a 2015 report published by Deloitte found that companies with diverse teams experience 2.3 times higher cash flow per employee. Similarly, a Boston Consulting Group study found that diverse management teams lead to a 19% revenue increase compared to homogenous management teams. Companies that embrace diversity within a firm also lead to higher employee satisfaction and increased employee productivity.
Measuring DEI Progress
There are quantitative and qualitative metrics used to incorporate DEI into environmental, social, and governance (ESG) data, and for tracking general DEI progress for a company. DEI as a whole can be measured through recruiting, retention, advancement, representation, and pay, but it’s important to understand exactly what is being measured at each step.
Diversity data is typically measured through quantitative statistics, including the number of diverse employees and the percentage of diverse employees in leadership positions. Equity and inclusion, on the other hand, are often measured through qualitative means. This includes evaluating internal DEI training and mentorship programs and understanding minority employee retention (as compared to non-minority employees).
Challenges to DEI Data Inclusion
The challenge of incorporating diversity, equity, and inclusion into portfolios stems from the historical lack of data access and current impediments to specific data points. Some data is collected and published, such as gender data, but race and ethnicity data are significantly less accessible – therefore more difficult to properly reflect in a portfolio that aims to capture integrated DEI initiatives.
Asset managers can use DEI information to inform portfolio management in various ways, including leveraging publicly reported data from EEO-1 reports (i.e. annual mandatory employee data reports), conducting direct engagement campaigns to understand the DEI dynamics of companies, and assessing a company’s DEI initiatives and goals.
As a whole, the investing industry has recognized the importance of these data points. The Securities and Exchange Commission has even approved a request submitted by Nasdaq that requires companies listed on its exchange to publish race and gender targets for their board members, as well as company level diversity statistics.
How DEI and ESG Work Together
DEI is often thought to only fit the S of ESG, but diversity, equity, and inclusion span the environmental, social, and governance spectrum. Although there are many obvious social considerations in DEI, there are also DEI aspects within the environmental and governance categories, too.
In recent years, there have been numerous shareholder filings that highlight the intersectionality between racial justice and other social issues. Shareholders submitted a resolution with Exxon requesting a report to analyze how Chevron’s policies, practices, and the impacts of its business, perpetuate racial injustice and inflict harm on communities of color.
Additionally, Costco shareholders submitted a proposal that requested a report on racial justice and food equity. The shareholder advocacy organization As You Sow also added four new key-performance indicators to its list that focus on the intersectionality between the environment and racial justice.
Investor engagement around diversity, equity, and inclusion has grown significantly over the past few years due to public interest in the topic. In 2021, EE0-1 disclosures around various metrics (including gender and racial breakdown for all employees at the firm) was a key topic. Many companies complied with the investor requests, and the 2022 focus on DEI has shifted from reporting the data to analyzing data.
Investors want to understand what the data means and how it is being considered when management makes decisions around diversity hiring, advancement, and retention. There are many different groups such as As You Sow and the Thirty Percent Coalition that aim to represent shareholder voices across these various challenges.
How Individual Investors Can Be Mindful of DEI
Although DEI data can sometimes be hard to come by, there are many ways an investor can consider DEI in a public markets portfolio:
- Investors can leverage what data is available and build a portfolio with certain minimum thresholds of gender and ethnic diversity at the leadership or board level.
- Investors can also inform portfolio construction by assessing DEI policies drafted and upheld by companies to better understand what initiatives companies are actually setting forth.
- Fixed income investors also have the unique ability to specifically invest in DEI solutions by purchasing bonds that directly fund projects targeting minority community improvement or build facilities for historically underserved populations.
- Lastly, investors can choose to invest in strategies that have diverse portfolio management teams, or with companies that are owned by women or minorities.
The simple act of awareness and acknowledgment, coupled with mindful portfolio construction, is a healthy and attainable start for individuals to support a stronger, more diverse future.
If you’re interested in examining your current investment portfolio or building a portfolio with diversity in mind, Abacus can help. Schedule a call with an Abacus financial advisor to learn how to get started.
