ESG Diversity, Equity and Inclusion
Learn all about ESG diversity, equity, and inclusion, and how to include diversity and inclusion metrics into your ESG reporting
What is ESG diversity, equity and inclusion?
Diversity, Equity, and Inclusion (DEI) are integral aspects of modern human capital management. As investor interest in DEI grows, organisations now prioritise them as crucial components of their Environmental, Social, Governance (ESG) reporting.
Within the ESG framework, diversity, equity, and inclusion form essential social factors, promoting fair treatment and full participation of all individuals. Particular attention is paid to historically underrepresented groups and those subject to discrimination based on sexual orientation, socioeconomic status, or disability.
Difference between ESG and DEI
DEI is generally considered to fall under the ‘S’ of ESG; DEI is therefore a core part of ESG but not the sum total of it. ESG also covers environmental factors, like biodiversity risk and carbon footprint, as well as governance factors, such as information disclosure and corporate ethics.
The aim of ESG diversity, equity and inclusion is to ensure a company’s workforce represents people of all backgrounds and that everyone has access to the same opportunities without discrimination.
Importance of diversity, equity, and inclusion
In recent years, there has been a growing recognition of the importance of diversity, equity, and inclusion (DEI) within the realm of Environmental, Social, and Governance (ESG) reporting. As a result, regulatory bodies around the world have started implementing requirements for companies to disclose information relating to DEI.
These regulations aim to promote transparency and accountability in corporate practices and encourage companies to actively address DEI issues. They serve as a means to push organisations towards greater inclusivity and equal representation within their leadership and workforce.
Under these regulations, companies are often required to disclose the composition of their boards in terms of gender, race, ethnicity, or other demographic factors. Additionally, companies may need to disclose information regarding their DEI goals, strategies, and any progress made towards achieving those goals. This provides stakeholders with insight into the company's commitment to diversity and inclusion.
In some cases, regulatory targets may be set, and companies are obligated to explain why they haven't met these targets. This requirement serves to hold companies accountable and encourages them to take concrete action.
Correlation between DEI and financial performance
In fact, several studies and examples highlight the positive correlation between DEI goals and financial performance. Here are a few examples:
McKinsey & Company's "Diversity Wins" report
In 2020, McKinsey published a report that analysed the financial performance of more than 1,000 companies across 15 countries. The study found that companies in the top quartile for ethnic and cultural diversity in their executive teams were 36% more likely to have above-average profitability than companies in the bottom quartile.
Sodexo's Gender Balance Study
Sodexo, a global food services and facilities management company, conducted a study that examined the relationship between gender diversity and financial performance. The study found that business units with gender-balanced management teams outperformed those without gender balance. The KPIs included operating margins, client retention, and employee engagement.
Unilever's Sustainable Living Brands
Unilever's Sustainable Living Brands, which include brands like Dove, Ben & Jerry's, and Lifebuoy, have demonstrated strong financial performance. According to Unilever's 2020 report, these brands grew 69% faster than the rest of the business, accounting for 75% of the company's total growth in 2020.
Salesforce's Equality Initiatives
The cloud computing company, Salesforce, has made DEI a core part of its business strategy. It implemented various initiatives, including equal pay assessments, diverse hiring practices, and employee resource groups. As a result, Salesforce has consistently been recognised as one of the best places to work. Their commitment to DEI is seen as a contributing factor to their financial success.
Unfortunately, however, there are many companies that find it difficult to set metrics for their DEI efforts.
DEI Metrics
Example ESG diversity metrics
Employee demographics
At the most basic level, it’s important to quantify employee demographics across all organisation levels, including leadership and the board. Below is an example of how this is reported.
Candidate demographics
It’s also important to track candidate demographics to better understand the applicants for roles within your organisation and whether any groups are not gaining access to these job opportunities.
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ESG and the board of directors
Employee demographics
Equal pay and pay equity
Thes are much-discussed DEI metrics. They are related concepts within the realm of DEI, but they represent different aspects of compensation fairness.
Equal pay
Equal pay refers to the principle that individuals should receive equal compensation for performing work of equal value. It focuses on ensuring that employees who perform similar roles or jobs receive equal pay, regardless of their gender, race, ethnicity, or other protected characteristics. Equal pay addresses the elimination of gender or other bias in compensation practices.
First, you’ll need to calculate the average hourly wage of male employees and the same for female employees. To determine whether there is a pay gap and, if so, how much of a gap, you would use the following formula:
Average male hourly wage – Average female hourly wage = $x
$x / Average male hourly wage = y
y x 100 = z%
Assuming the organisation has an average hourly pay rate of $52 for males and $46 for females, it would work out as follows:
$52 – $46 = $6
$6 / $52 = 0.12 x 100 = 12%
Pay Equity
Pay equity, on the other hand, encompasses a broader perspective on fair compensation practices. It aims to identify and rectify any unjust wage gaps or disparities that may exist within an organisation. Pay equity involves conducting assessments to determine if there are systemic pay gaps, and taking corrective measures to address them.
Employee promotion rate
Research by McKinsey shows that women are still experiencing slower promotion rates than men. Women of colour are even worse off, with their advancement slowed at every promotion opportunity. A hot topic in many high profile industries, this is an important ESG diversity, equity and inclusion metric to monitor and report.
The formula for this would be:
Total # of employees – Total # of women of colour who were promoted = x
x / Total # of employees = y
y x 100 = z%
Example ESG inclusion metrics
Retention across employee groups
Insight and transparency into your employee retention rate across different demographics allows for potential DEI issues to be discovered and rectified. This ensures the organisation is an inclusive workplace.
If you wanted to calculate the organisation’s retention rate of black employees, the formula would be:
Total # of employees – Total # of black employees who left = x
x / Total # of employees = y
y x 100 = z%
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Adverse impact
Adverse impact happens when a particular “protected” group is discriminated against during a selection process.
To calculate adverse impact, you need to use the Four-Fifths Rule, which states that, “the selection rate of protected groups – which include race, sex, age (40 and over), religion, disability status, and veteran status – should be 80% or more of the selection rate of non-protected groups to avoid adverse impact against the former.”
The formula for this would be:
Total # of employees – Total # of women of colour who were promoted = x
x / Total # of employees = y
y x 100 = z%
3 common barriers to ESG diversity, equity and inclusion
1. Lack of clarity and coordination
DEI initiatives are usually managed by HR. However, measurement isn’t always well defined, which makes it hard to monitor and communicate progress. In addition, there tends to be a lack of coordination between HR, IT and finance, which is necessary for meaningful diversity and inclusion programmes.
2. Reluctance to be transparent
Once measurement is in place, many organisations become reluctant to disclose their DEI metrics because the story they tell isn’t overly positive. However, the point of disclosure is transparency, ownership, and commitment to the steps necessary to improve. Stakeholders are more impressed with the truth and a plan of action than silence.
3. Lack of consistency and maintenance
ESG diversity and inclusion is not a set-and-forget exercise. Often, companies put programmes and metrics in place but fail to maintain them or update them to align with changing public opinion. The result is that the business quickly looks outdated or insensitive. DEI initiatives should be approached in a cohesive way with a clear vision, as opposed to a reactive and disparate set of individual activities.
60-second takeaways
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Diversity, Equity and Inclusion (DEI) are important elements of human capital management and ESG reporting.
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DEI is important both in terms of compliance with reporting mandates and financial performance.
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DEI metrics include employee and candidate demographics, employee retention, promotion rate, adverse impact, equal pay, and pay equity.
Common barriers to DEI success in organisations are lack of clarity and coordination, reluctance to be transparent, and lack of consistency and maintenance.