Where gender diversity fits in with ESG

Public companies face growing pressure from investors to increase the representation of women on corporate boards and across executive leadership, highlighting a greater awareness of the need to address environmental, social, and governance (ESG) issues. Mounting evidence suggests that gender diversity can help profitability and reduce risk, yet findings from PwC’s Annual Corporate Directors Survey at the end of last year showed that more than four out of five (86%) of director respondents agree that companies should be doing more to help promote gender and racial diversity in the workplace.

So why the apparent hesitancy?

As mentioned in an earlier blog, the ‘S’ in ESG is commonly perceived as difficult to measure. Measuring carbon reduction, or assessing the proportion of women on boards when looking at ‘E’ and ‘G’ are neatly quantifiable; looking at more nuanced and complex areas such as corporate treatment of people, and the knock on impact this has on women in the workforce is not so simple.

As is the case for many areas of social and economic development, the COVID-19 pandemic slowed progress made on gender equality. The World Economic Forum’s 2021 Global Gender Gap Report declared that the expected time it will take to close the gender gap has grown from 99 to 135 years. 

On a global scale, armed conflicts, oppressive political regimes, natural disasters, the climate crisis and spiralling inflation continuously cause disproportionate harm to women, and women of colour in particular.

Likely because of these factors, women are thought to be more inclined to make investment decisions based on both their own values and benefits beyond financial impact. It is unsurprising, therefore, that as women’s financial power grows (albeit slowly), so does focus on integrating ESG factors into policies and decision-making.

Regulatory change

Last year the U.S. Securities and Exchange Commission (SEC) set out requirements for all companies listed on Nasdaq’s U.S. exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors.

The Financial Conduct Authority (FCA) recently introduced rules for listed companies requiring declarations of diversity metrics against common targets on a “comply or explain” basis. These new rules stipulate that at least 40% of board members are women, and at least one of the senior board positions is a woman. 

Times are changing

Companies are striving to address pay disparities based on gender, race, and other demographic characteristics as younger consumers and investors focus more intently on these inequalities.

While this is undoubtedly a moral issue, the agenda is also driven by concrete metrics that show investing in companies that prioritise gender diversity can be beneficial to both businesses and investors. A study by McKinsey found that companies in the top quartile for gender diversity on executive teams are 25% more likely to have above-average profitability than companies in the bottom quartile. 

Further to this, a study by the Boston Consulting Group found that companies with leadership teams that have above-average diversity generate, through product innovation, revenues that are 19 percentage points superior to companies with less diverse leadership teams, and enjoy earnings, before taxes and interest, that are 9 percentage points higher.

Improved risk management is also a potential benefit. According to a study by MSCI, boards with higher levels of gender diversity tend to experience fewer instances of bribery, corruption and fraud, and overall more robust management of ESG-related risks.

Women are leading the way

Retaining quality talent, and diverse skills and viewpoints are among the contributors thought to better position companies for long-term value creation. In addition, stakeholders increasingly back companies who practise what they preach. Female leaders signify an organisation that takes diversity seriously. In a recent study it was revealed that corporate board diversity quotas improve gender equity for lower-ranking women in the workforce too – the resulting introduction of equality initiatives have “downstream effects,” improving outcomes for women at all levels of the workforce.

Despite progress made, we are still a long way away from achieving gender equality. Thanks to growing investor demand, increased data and transparency driving investment strategies, and stronger impact reporting capabilities, investors have more opportunities than ever to create more equitable outcomes for all, while reducing environmental impact. 

Key to this progress is harnessing technology; to track cross-team ESG conversations and engagements in one place, to measure impact, to demonstrate activity to internal and external stakeholders as simply as possible, and to ensure regulatory adherence along the way. 

If you’re looking to enhance your ESG reporting get in touch with the SI Engage team to request a demo. 

Image credit to Vecteezy.com.