Learn how DEI became a crucially important ESG pillar and how it affects investors' decisions.
ESG is a set of environmental, social & governance standards for a company’s behavior used by investors to assess investment risks. People and investors increasingly want socially responsible, inclusive, and sustainable organizations that positively impact on people and the world, not only on their own bottom line. And they want the proof and are demanding transparency into organizations’ DEI efforts.
DEI is woven throughout ESG. Whereas prior emphasis has been on the environmental criteria (E) of ESG, investors are realizing sustainability begins with people - and are including DEI performance in the investment analysis. When it comes to DEI, the social criteria (S) of ESG reflect the relationships your company has, and reputation it fosters, with people and institutions in the communities it does business. As to Governance criteria (G), gender-diverse boards are linked to improved investment efficiency, better engagement between board members, and fewer fraud cases & operations-based lawsuits.
Poor ESG leads to greater systemic inequities, whereas an ESG-DEI approach that focuses on addressing systemic inequities strengthens all of ESG.
The social element of ESG issues can be the most difficult to assess, link to a company’s performance, and show progress. Companies must work to overcome four barriers to measure and report DEI:
1. Uncertainty how to define, manage, and communicate DEI efforts.
2. Unflattering company image: companies are hesitant to disclose the details of their DEI metrics, they’re uncomfortable with the story the metrics tell.
3. Outdated understanding of DEI: companies may have fail-ed to update DEI programs to keep up with social movements, they risk appearing insensitive to certain emerging issues.
4. Struggle to measure progress: companies need to ask themselves the tough questions and have thoughtful reflection on how to continue to move the needle in this space.
To overcome some common barriers to ESG and DEI reporting, executives should embrace three leading practices:
1. Construct meaningful narrative around DEI efforts that inspires the workforce.
2. Ensure the commitment of leaders (CEO & executives) to DEI reporting.
3. Take a data-driven approach - define a set of relevant metrics & determine what information to report.
Treat DEI as an inherent element of ESG reporting, not a nice add-on to building company’s public image. Success is achieved when there’s engagement with DEI at every level of the organization.
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