2020 was a year of disruption. The outbreak of COVID-19 and global protests for racial justice have exposed major inequalities, including the existence and pervasiveness of systemic racism. Failure to act on diversity and inclusion (D&I) issues is a business risk that needs to be a top corporate agenda item, alongside financial and environmental resilience.

Investors are also looking to advance D&I within their organizations and investment portfolios, which will include engaging with investee companies along their own D&I journeys. The Responsible Investment Association (RIA) held its D&I Week from October 26–30, 2020, providing a much-needed forum aimed at investment professionals on how to tackle such important and complex issues.

The morning panel on October 28, “Corporate Diversity Data: Overview, Challenges, and Opportunities,” covered one of the major challenges in adopting a more systematic approach to D&I: data limitations. The panel shared the perspectives of an index provider (Elena Philipova, global head of ESG at Refinitiv), a D&I solutions provider (Laura McGee, founder of Diversio), and an asset manager (Hasina Razafimahefa, who focuses on proxy voting at NEI Investments). The panel was moderated by Milla Craig, founder and president of Millani, a company that helps investors and companies incorporate ESG into their processes.

D&I risks are business risks
Companies with strong D&I performance tend to experience less volatility and increased returns, given their reduced risk for scandals along with a more productive and engaged workforce. As such, D&I is increasingly scrutinized as a way of holding companies accountable at AGMs and during due diligence processes.

For investors, the negative impacts of investing in a company facing a scandal are immediate and negative. Market capitalizations can drop significantly following a scandal, with bankruptcy occurring in extreme cases. Investors can avoid getting caught in the blowback by quantifying and measuring the impacts of D&I and incorporating these factors into their investment thesis from the outset.

The data limitation challenge
Most of the D&I data currently available is focused on gender diversity, with significant data gaps regarding other aspects of diversity such as race and ethnicity. That lack of information makes it difficult for investors to assess these other facets of diversity. As with most ESG data, D&I data reporting is voluntary and many companies do not report on these metrics, or on how they are executing their D&I commitments. Adding to this data limitation problem is the difficulty involved in quantifying multiple intangible aspects relating to culture.

D&I data is essential to better understand a company’s current situation, determine gaps, set goals, and track progress. However, it is difficult to enable change within an organization when there is insufficient information about its current state and there is no one to be held accountable.

Company concerns on data collection and solutions
Worldwide regulatory differences—know the local law and adapt appropriately
Companies with worldwide operations, and investors with international portfolios, recognize that jurisdictions differ in their rules and rulings regarding D&I data collection, their inclusion-related issues, biases, barriers, and cultures. Creating effective D&I collection across these regions requires an understanding of local laws and how to customize and adapt data collection methods by region. Note that very few regions in the world expressly prohibit the collection of demographic data collected for an affirmative purpose.

Privacy issues—building trust and acting on feedback is key
D&I data is inherently sensitive, and it can be challenging to maintain privacy during the collection process. Companies should be transparent regarding the purpose of the data collection and ensure employee information is anonymized and untraceable. Working with a third-party to implement multiple levels of control that ensure anonymity is an effective method of building trust and overcoming privacy concerns.

Even with assurances of anonymity, some employees may worry that data might be used against them, and be reluctant to answer a D&I survey. Response rates for subsequent surveys can rise quickly if a company takes the approach of collecting the data for a positive purpose, and then—more importantly—acts on this data in a way to improve employee experiences.

Reputation risk—transparency on the route to improvement
Some companies prefer not to disclose their D&I data if they believe their current situation is not positive. However, most investors are not looking to penalize companies for their data but simply to have all companies disclose their data and show concrete actions in addressing their D&I issues.

Meritocracy as an excuse to not setting targets—diversity leads to widest talent pool
The argument of meritocracy is used as an excuse not to set D&I targets, suggesting they lead to compromises on talent and merit. The reason to target a more diverse board, however, is to access the widest possible talent pool and select the best candidates with the most diverse qualifications and skills. If such an argument is used, it might be important to question a board’s education on D&I to see if they have attempted to address these issues through training, such as unconscious bias training.

Getting lost in the average—disaggregating is essential
It is important to disaggregate scores when running surveys to ensure the negative experiences of certain groups are not lost in the average. Breaking the data into dominant and non-dominant groups can help determine any systematic biases. Free-text responses can also provide information on issues such as harassment and exclusionary behaviour.

Other important information for assessing D&I within an organization
Whistleblower mechanisms: can assess existing complaints, but only leading companies will disclose the types of complaints they receive and how they’ve addressed those issues

Controversies: can identify cultural issues through controversies a company is facing (e.g., what actions were (or weren’t) taken to keep front-line employees safe during the COVID-19 pandemic?)

Support of flexible working hours: creates culture and workplaces that are inclusive but also essential during times such as COVID-19 to sustain business operations and enable workers to work from home

Availability of daycare centres and services offered to employees: can increase women’s participation in the workplace and assist career progression

Workplace reviews and social media: can apply natural language processing (NLP) to sites like Glassdoor and Indeed to uncover issues and hold companies accountable; tools are available that can scour social media to quantify or predict if a company is at risk of a scandal related to D&I

What can be done to improve the quality and availability of D&I data?
Like most ESG data, publicly reporting D&I data is voluntary. While the available data is not perfect and includes multiple gaps, there has been continuous improvement in the overall availability and quality over time. That said, the need for harmonized standards and harmonization of disclosure standards remains. The following represents the main drivers of improvement in D&I data quality and availability and where investors can focus their efforts.

Investor pressure and active ownership
Investor pressure has been a major driver behind the increased availability of D&I and ESG data. Companies have faced a growing number of shareholder proposals requesting better data disclosure. Engagement provides the opportunity to talk with companies and gain a better understanding of how inclusive a company really is. During these discussions, investors can request greater data availability, as well as flag and work on addressing potential D&I concerns. Investors can amplify their impact by collaborating with other investors and voting against board members based on diversity concerns.

Regulation
On the regulatory front, the Canada Business Corporations Act has implemented Bill C-25, which, as of January 1, 2020, requires companies in Canada to disclose the percentage of the board and senior management who are women, Aboriginal, members of visible minorities, and persons with disabilities.

Industry initiatives
Industries have come together to improve diversity within their fields. An example of such an initiative is Measure Up, where Refinitiv and Fortune 500 joined forces urging companies to take steps towards reaching full racial and ethnic diversity in the workplace and report on D&I metrics. They are launching a new D&I filter allowing companies on the 2021 Fortune 500 list to be sorted and ranked.

Putting it all together
Like many other company data points, D&I performance should be evaluated on an absolute and relative basis compared to peers, as D&I topics can differ greatly across different sectors. No one data point will provide a comprehensive assessment of a company and its culture, but rather requires a combination of multiple data points.

One method of systematically assessing companies is to create a standard scorecard with metrics that have clear business relationships. McGee’s company Diversio, as an example, creates a scorecard for its clients using the following six metrics, which each have a clear business relationship: inclusive culture, bias and feedback, flexible work option, safe work environment and harassment, mentorship and sponsorship, recruiting and hiring.

Greater availability and quality of D&I data helps companies determine their current state of play, set targets and work towards improvements, which will drive shareholder value. D&I data helps investors gain a more thorough understanding of a company, which can protect against avoidable negative consequences, as well as being able to differentiate between leaders and laggards. This ultimately helps build not only diverse and more inclusive workplaces, but a more just and equitable world.