The upheaval of 2020 has been defined in part by highly visible social movements. Companies have found themselves in the crosshairs, pressed to declare their commitments to causes and articulate the steps they are taking to support social justice.
The public’s heightened expectations for companies have dovetailed with the growing interest of investors in environmental, social and governance (ESG) factors, which include diversity and inclusion (D&I). The pursuit of diversity isn’t just about doing the right thing. A diverse workforce can drive better outcomes that can actually enhance business growth and brand reputation. However, this renewed emphasis has also highlighted the fact that many organizations do not have consistent, standard metrics in place to track progress and report results.
To overcome some common barriers to ESG and specifically D&I reporting, executives should embrace three leading practices: construct an inspiring story, engage the right leaders and take a data-driven approach. Organizations that are successful in this initiative will be better able to communicate their commitment and progress, increase employee engagement, manage associated risk, and ensure their efforts are achieving their goals — while also improving their reputation and performance, as well as gaining greater interest from investors.
D&I, a component of the social pillar of ESG, has generated significant attention in the media and from institutional investors who are now incorporating ESG considerations within their investment processes. From what we have seen, investors, business partners and consumers are paying more attention and demanding transparency into organizations’ diversity programs, metrics and key performance indicators.
But many companies struggle with how to measure and report on D&I. The social element of ESG issues (specifically D&I) can be the most difficult for investors to assess and for companies to show continued progress. Unlike issues associated with the E and the G, which are more easily defined and have an established track record of data, social issues are less tangible, with less mature data to show how they can affect a company’s performance. Companies must work to overcome four barriers.
Uncertainty regarding how to define D&I
There is a divide among stakeholders on how to manage and communicate D&I and other ESG efforts, what the term even means, and how to go about tackling some of these important issues. Furthermore, D&I programs are typically managed by HR and often tracked in a way that makes them difficult to communicate externally — if they are tracked at all. In some cases, companies have decided they do not want all of this information tracked, or they house this information in multiple systems across the organization. Indeed, a lack of coordination among HR, IT and accounting or finance, which is well versed in metrics and reporting to investors and regulators, is commonplace.
Potentially unflattering image of the company
Transparency, coupled with future commitments, drives greater accountability and therefore action and engagement in the solution across the entire company. Yet many companies are hesitant to disclose the details of their D&I metrics because they are uncomfortable with the story the metrics may tell, or the metrics could potentially be seen as inconsistent with how the company is perceived externally. Therefore, they may be inclined to defer being transparent until the metrics look better.
Outdated understanding or awareness of D&I
Companies may have implemented programs and metrics but failed to update them to keep pace with social movements and changing public consciousness — meaning they risk appearing out of step or insensitive to certain groups or emerging issues. In organizations that have added initiatives in a reactive way, the array of programs can lack cohesion or a guiding vision or goal.
Struggle to inspire and measure the progress of D&I
Even with strategy and program changes or enhancements, companies will still struggle to get this right. It is important for companies to recognize this upfront. Progress for D&I will look different than a lot of the other ESG components, and companies will need to own the fact that progress is not always measurable, which will make this a hard journey. Companies can be transparent, and stakeholders will appreciate this, but they need to be willing to take a step back and ask themselves the tough questions and have thoughtful reflection on how to continue to move the needle in this space and what bold actions they can take to have a meaningful impact.
To adapt an organization’s workforce to one that is more diverse and more inclusive, business leaders should focus on three leading practices.
While reporting metrics is important, and these metrics reveal where a company is in terms of pure numbers, they don’t necessarily reveal the full story of a company’s values, what programs it has in place and what efforts it has made. An inspiring narrative can bridge this gap. It’s critical to build a narrative around D&I efforts that links specifically to the corporate purpose, aligns the leadership team and inspires the workforce.
Designing the right reporting and employee and stakeholder engagement — and linking D&I to a company’s mission — will help an organization encourage desired behaviors and mobilize individual and organizational efforts toward its goals. The actions of employees, those along the supply chain and stakeholders directly reflect their experiences with the organization’s ideals and priorities. When employees clearly understand why — that is, what’s behind a request or an effort — it positively affects both what they do and how they do it, which ultimately will affect the perception and engagement of all stakeholders.
The key thing to remember is your starting point does not matter. The important thing is the vision and starting the journey now, while inspiring the entire organization to get involved and move together.
D&I initiatives aren't simply an add-on to a company's other activities and objectives; much like the rest of ESG, they go beyond sustainability officers. And the way to achieve that is to ensure the commitment of its leaders. The CEO and other executives need to communicate why it is important and work with all internal stakeholders to ensure it’s part of the strategic plan.
Most companies have a sustainability group or an individual sustainability officer who issues an annual corporate responsibility report. But this team or officer may not be integrated with D&I decision makers, a company’s strategy development, asset allocation, risk assessment, financial reporting, and investor relations teams. They also may not have an appreciation for the processes and controls that are needed to issue metrics that are based on investment-grade data. D&I information may therefore not be embedded, or even considered, in the overall enterprise risk-management process or business strategy, preventing that strategy from creating value in the long term. With the push from investors and the Securities and Exchange Commission for both quantitative and qualitative disclosures in SEC filings, it is becoming increasingly important for financial reporting decision-makers, as well as internal audit, to be engaged.
The financial reporting group can be a trusted adviser, given its familiarity with processes and controls associated with Sarbanes-Oxley (SOX) compliance, and can leverage knowledge of those mature processes to support the D&I data. This is important because without proper process and controls, the company's position will not have credibility and confidence in the marketplace. Additionally, this group can help to model the governance of this data and has an appreciation for pain points it may have encountered that will be helpful to an organization starting on this journey.
The metrics are just one part of the reporting. The chief human resources officer and chief diversity officer are critical to telling the story and developing the strategy for a more diverse and inclusive workplace. A disclosure without information on where your company has been, where it is now and where it aspires to be will not accomplish the objective of greater transparency: holding your leaders accountable for progress on your commitments to greater diversity, equity and inclusivity, both within your four walls and externally.
The right data can help companies do everything from optimizing business processes to understanding customers and the workforce on a deeper level than ever before, and it’s central to effective D&I efforts.
To date, a limited number of companies have disclosed D&I data, but the numbers are increasing significantly. The limited amount is likely driven by the reaction from internal and external stakeholders with the story the data may tell absent robust and formal D&I strategies and policies. Additionally, disclosure had been optional, but the SEC on Aug. 26, 2020, amended its disclosure requirements relating to the description of the business, legal proceedings and risk factors. The final rules require registrants to describe certain aspects of their human capital resources within the overall framework of principles-based disclosures. The new human capital disclosures should be supported by effective controls and procedures, showing that the movement toward a data-driven approach has started.
But companies face a few key challenges when it comes to measuring, reporting and gaining deeper insights from data. For instance, in terms of ESG reporting, there is often no consensus on what metrics to report. Companies also frequently lack a standardized reporting process, controls and quality data, and reporting is mostly manual.
To counter such hurdles, leaders should define a set of relevant ESG metrics and proactively determine what information to report, how to source it and who the key stakeholders are. They should likewise standardize data sources and attributes, data quality expectations, definitions of metrics, and general policies and procedures related to gathering data. And they should make use of existing finance reporting processes and tools — using these and other methods to automate reporting and analysis — and upskill employees to derive and communicate insights from the data.
Companies can begin by pursuing a three-step process to enhance their D&I strategies, policies and reporting readiness.
Through this exercise, companies can show both progress and accountability. They can also use their data-driven insights to gain a clear understanding and path forward for delivering stronger D&I outcomes today and tomorrow.
The D&I journey is one of the most difficult challenges for an organization to take on — but like most things of utmost importance, it’s the right thing to do. It can be challenging to know where to begin on the journey to measuring and reporting on D&I — and such initiatives can be hard to maintain.
But as a critical component of ESG reporting, a focus on D&I is no longer just a nice-to-have. With a clear and strategic approach — built around an inspiring narrative, leadership engagement and data — companies can accurately reflect their progress, align their reporting with investors’ expectations, and more confidently and transparently communicate what they stand for as organizations.