How Meaningful Commitment To IE&D Can Enhance A Company’s ESG Profile

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ESG and IE&D are both focused on the sustainability and societal impact of corporate management, but their underlying concepts are distinct and should be evaluated individually to maximize impact. 

As investors, employees and consumers continue to expect more from corporations surrounding commitment to social justice issues and investing in organizational diversity and equity, the increasing trend in reporting on Environmental, Social, and Corporate Governance (ESG) efforts has dovetailed with inclusion, equity and diversity (IE&D) considerations. Although ESG is often tied to societal considerations, it is based on financial justification at its core. In other words, through metrics, companies endeavor to quantify and measure the long-term value of sustainable management.

Similarly, while events of the past year have increased the prominence of the social justice aspect of IE&D, an inclusive, equitable and diverse workplace also has numerous business justifications—including improving hiring and retention, enhancing innovation and helping organizations better reflect and respond to the communities they serve. Strategies related to both ESG and IE&D can enhance financial performance, brand recognition and employee engagement. Thus, consumers, investors and employees are demanding metrics that will help them evaluate a company’s values and commitments and assess long-term financial viability.

The Overlap Between IE&D and ESG

ESG and IE&D considerations are both focused on the sustainability and societal impact of corporate management. However, their underlying concepts are distinct and should be evaluated individually to maximize impact.

Evaluation of ESG metrics enables employees, consumers and investors to determine if a company’s values align with their own. While much attention has been paid to the environmental pillar of ESG, the growing conversation surrounding social justice issues, and IE&D as an organizational imperative, has raised the prominence of the social and corporate governance pillars of ESG, which evaluate a company’s relationship with its employees, consumers and community, and a company’s leadership, executive compensation, and internal controls—and has increased attention on related metrics.

While IE&D are often called a triad, the components are conceptually distinct and vary in how they may be quantified. Inclusion refers to people of varying characteristics, identities, abilities and experiences feeling valued and encouraged to contribute within an organization. Equity refers to systems that ensure fair treatment and equal access to opportunity and resources. Diversity refers to the mixture of varying characteristics, identities, abilities and experiences.

IE&D are valid business considerations because they enable companies to attract, retain and maximize the potential of those with the best skill. Companies maximize their human capital by making decisions based on employees’ skills. However, inequitable systems, outdated practices and hidden biases interfere with skill-based decisions and can result in the underrepresentation of certain groups in the workplace.

The Value of Metrics

Although there has been a surge in investment in organizational IE&D, most companies experience challenges in executing related strategies. To quantify and measure the impact of IE&D efforts, companies are increasingly tracking applicant and employee demographic information, building key performance indicators into IE&D initiatives, and analyzing changes in workforce composition in the aggregate. A data-based understanding of workforce demographics can improve the effectiveness of IE&D initiatives and allow for targeted investment to maximize impact. As with ESG, certain IE&D metrics are common and facilitate such a comparison. For example, the Nasdaq ESG Reporting Guide 2.0 identifies key metrics that relate to workforce IE&D or can be improved through IE&D initiatives, including corporate board and workforce diversity, pay ratios, employee turnover and non-discrimination.

Employees, consumers and investors attribute value to workforce demographics as indicators of IE&D. Related metrics are increasingly being disclosed externally and internally. While evaluation of these metrics can provide significant insight, haphazard or ill-informed analysis and distribution of such metrics can result in legal noncompliance and liability for organizations.

Considerations Specific to IE&D

Impacted by factors like industry, location, limitations on how identities are measured, and employment law implications, the collection and evaluation of IE&D metrics can be particularly nuanced.

Workforce demographics should be evaluated in the context of industry and location data because the availability of qualified employees for any job can vary based on industry and location.

And, although diversity and demographics are related, the demographic information typically collected through voluntary self-identification surveys is limited in that it cannot reflect all the ways that individuals can be diverse. For that reason, demographic data operates as proxies for IE&D but is not a complete depiction. To truly succeed in IE&D, organizations should focus as much on qualitative as well as quantitative metrics.

In addition, anti-discrimination laws create a tension between IE&D and the emphasis on related metrics. Anti-discrimination laws in the United States make employment decisions based on protected characteristics such as race, ethnicity and gender unlawful. These laws are not based upon minority status. In other words, making an employment decision based on a protected characteristic to improve IE&D can actually expose a company to legal risk. An overemphasis on metrics can increase the risk that specific employment decisions are viewed as being based on protected characteristics to improve metrics. Instead, it is important that a valid justification for an employment decision (i.e., skill) be identified and articulated.

Understanding these nuances can help companies appropriately leverage demographic data and lawfully improve IE&D.

Anticipating Reporting Requirements and Expectations

In addition to companies tracking and voluntarily disclosing their IE&D metrics, legislatures are increasingly imposing equity and diversity-related reporting requirements. For example, California and Illinois have imposed pay data reporting requirements for certain employers. Additionally, numerous states, including California, Illinois, New York, Massachusetts, Maryland and Washington, have adopted laws relating to corporate board diversity. And in August 2021, the Securities and Exchange Commission (SEC) approved a rule that will require Nasdaq-listed companies to disclose information about the diversity of a company’s board of directors.

There is no indication that these intersecting trends—interested stakeholders expecting companies to demonstrate investment in diversity and equity; corporations attempting to track and report on their demographic metrics; and increased regulatory and legal disclosure requirements—will abate. Accordingly, organizations that make meaningful investments in inclusivity, equity and diversity, while understanding the legal frameworks that underpin and govern these investments, can increase resilience, maximize employee engagement, elevate their public image, and enhance their ESG profile.

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