When it comes to environmental, social, and governance (ESG) issues, our attention tends to focus on the first part of a three-pronged challenge. Recently, the Covid-19 pandemic has exposed great gaps in the social aspect of ESG, but will the obstacles created by the pandemic itself foil the attempts to build new bridges in diversity and inclusion? Julie Sherratt, Managing Director, Business Governance & Portfolio Oversight, TD Asset Management, and Vanessa Allen, Associate, Investment Risk, TD Asset Management, argue that staying the course will be critical for the future.
The past several months have put a much needed spotlight on the social aspect of ESG risks, with the S factor encompassing an array of critical and varied issues. As a result of the pandemic, issues such as financial security, employee health and safety, racial inequity, and data privacy are taking on a more defined importance. Moreover, the rapid pace of net inflows into ESG funds in the first half of 2020 make more apparent the fertile ground on which these issues will be carried. While ESG funds are particularly attentive to social issues, these are issues that are often inherently relevant to assessing the risk return profile of many investments.
Diversity and inclusion in the workplace could be a part of the solution to remedying lapses in any one of the social issues that have come into focus during the pandemic. The issues mentioned are disproportionately matters faced by minorities. There is growing evidence that minorities are more heavily affected by Covid-19 for various reasons, including income inequality, racial discrimination, access to healthcare, and disproportionate employment as essential workers. Many of the companies developing solutions to address and contain these issues, however, often lack a diverse workforce themselves. That lack of diversity runs the risk of companies building product solutions that simply perpetuate longstanding inequality and bias.
The investment implications stemming from a lack of corporate diversity have become more and more apparent. Various studies have demonstrated that a diverse workforce can lead to better innovation and stronger business outcomes. These studies have laid out the business case for inclusion and diversity – both by gender and ethnicity – finding a robust connection between corporate diversity, inclusion and elevated financial performance relative to less diverse companies.
Aspects such as a company's inability to develop and retain a diverse employee base, or its failure to recognise how its products and solutions negatively impact certain minority populations can impede business growth. The consequence of this can be a poor working environment, boycotts on company products, and legal action – all of which can further deteriorate the bottom line. Asset managers want to ensure the long-term health of companies and should acknowledge the portfolio risks that come with companies not moving forward on diversity and inclusion.
For example, with the global confinement, we are all growing our online footprint. Tech companies have weathered the market well given the innovative conveniences they allow us, accommodating the need for physical distancing across the globe. Moreover, data utilisation has advanced efforts to track, trace and contain the spread of Covid-19. However beneficial their work, tech companies are also facing added scrutiny and legal challenges around the implications of actual and potential data misuse. The extent to which data is collected and then later used to the detriment of minorities has been a major point of contention. In Canada, there is currently a well-intentioned push for the collection of race data to more distinctly understand how and why Covid-19 is disproportionately impacting minorities, particularly black and indigenous communities. However, there are calls to ensure that the right people are in place to make sure the process is sensitive to the racial biases that can be perpetuated by such data collection. In addition, this proxy season saw a few large tech firms face shareholder proposals pushing for company assessments of the human rights risks inherent in their business as they sell their data and technologies to clients. In developing solutions to address these concerns, diverse and inclusive companies – with diversity of mind, background, and experience – would be well positioned to mitigate risks to vulnerable communities.
The renewed vigour behind improving racial justice and the resulting corporate commitments to expand workforce and management diversity is a positive sign and something to be monitored overtime, particularly as regulators contemplate expanding disclosure to help inform various stakeholders of corporate diversity trends. However, there remains the risk that job losses, physical distancing, and remote working environments will thwart needed progress on diversity and inclusion. The need to stay the course is more important than ever to both ensure racial equity as well as the advancement of sustainable long-term value creation.
This article was first published in the RiskMinds Q3 2020 eMagazine.