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Focusing on the ‘S’ in ESG – How disclosure and action can aid diversity

The coronavirus crisis and public protests have pushed the issue of equality to the fore in 2020. How should companies respond and where do the risks and benefits lie?

In addition to the coronavirus pandemic, 2020 will be remembered as the year when issues around equality became supercharged.

As COVID-19 spread around the world, commentators increasingly noted the social disparities the pandemic was revealing. Key workers – those responsible for keeping the economy running while the authorities were facing down the virus ­– are overwhelmingly from lower-income households. People from ethnic minority backgrounds reportedly faced a greater health risk from the disease. Women and minorities have suffered more severe economic hardships as countries shielded themselves and shut down.

While much attention has gone to the US, this state of affairs is not specific to the country. The UK Office for National Statistics found that mortality rates for black and other minority ethnic (Bame) groups are up to four times higher than those of white Britons. Geographic and socioeconomic factors accounted for more than half the difference in risk between black and white ethnicities.

Racial injustice was also thrust into the spotlight. As the Black Lives Matter and I Can’t Breathe protests spread to cities worldwide after George Floyd’s death, companies in numerous sectors pledged or reaffirmed action to boost corporate diversity. Pressure subsequently mounted on companies to disclose more regarding the ethnic make-up of boards of directors

All this has merely brought equality issues that already existed to the fore. There is a moral imperative to address these problems. Some studies point to the financial benefits of taking action, with research indicating that unequal societies act as a barrier to economic growth. Not investing in social mobility can hamper both economic and social returns.

As an asset manager, what can we do? Calling for disclosure and action

Largely in response to the Black Lives Matter and I Can’t Breathe protests, US companies pledged to set internal diversity targets and fund more social initiatives. Being proactive on meeting these pledges, making inroads into changing company culture and being transparent about the progress they achieve should make a big difference.

Asset managers can play a role by providing stewardship and actively engaging with companies that may have missed the mark.  Through engagement, BNP Paribas Asset Management encourages companies to evolve and improve their social behaviour, thereby reducing reputational risk and potentially enhancing the sustainable returns for clients.

We believe engagement is critical. That is because some environmental, social and governance (ESG) [1] datasets are easier to come by than others and transparency around diversity statistics is relatively low, even in the US.

While companies often track these metrics, they are rarely reported. As an example, when it comes to supply chains – which are a recurring flashpoint in companies’ ESG risk materiality matrices – a recent study from the US Government Accountability Office highlighted that human rights risk is the least-disclosed area of ESG. There is work to be done here and this is where engagement can make the difference.

Engagement sets the path for disclosure and action

Companies will often target diversity, but forget inclusion. Once diversity targets are met, the challenge is to ensure that the workforce is not just diverse, but thriving: That is true inclusion.

This is where our call for action through engagement is crucial. Companies will find it hard to make a success of diversity if they refuse to recognise that it brings challenges as well as opportunities. They will find it impossible to confront these challenges if they dismiss any reasonable question that is raised about their diversity policies.

At BNPP AM, we engage with companies to understand whether their diversity strategy is an act of window-dressing or a true roadmap to a collegial culture, cooperation and dialogue.

Diversity does not produce better results automatically; it does so only if it is managed well. We are conscious that it takes time and organisational competencies to achieve diversity and inclusiveness across all dimensions. It requires hard work and clear thinking. That is the only way for the companies to get returns on their investment in diversity.

It is worth pointing out the risks – reputational and financial – for companies that fail to act on diversity commitments. These are highlighted not just by recent well-reported criticisms of internal culture and progress on diversity at certain organisations, but also a trend of stakeholder litigation against companies failing to follow up pledges on diversity with concrete actions.

Also read:

[1]Environmental, social and governance along with responsible investing and sustainable investing are broad umbrella terms that refer to the incorporation of environmental, social, and governance considerations into investors’ portfolio decisions.

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

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