by David Pritchett, Managing Director of the EDGE Certified Foundation
Shareholder activism is well known for driving change in a business that is believed and perceived to be poorly managed and bringing about systemic changes in the way large businesses are run. It is also increasingly well known for driving change and holding organizations to account on ESG issues, primarily climate change-related ones, in recent times.
But is it also gaining momentum in the area of Diversity, Equity and Inclusion (DE&I), evidenced – in the US in particular – by a sharp increase in resolutions relating to racial and civil rights and pay equity, and activists calling out major players including Walt Disney Co, Apple Inc and McDonald’s Corp for inequities in employment and compensation practices. Nike Inc, too, is being obliged to release data on the recruitment and promotion rates of under-represented groups by the end of 2024 as a direct result of shareholder pressure.
So how can Institutional Investors drive real and sustainable progress beyond the green agenda, within the ‘S’ of the Environment, Social and Governance (ESG) agenda?
Seeking To Make A Difference
There are perhaps three primary ways an Institutional Investor can seek to make a difference:
- Through their capital flows into ESG investments and funds, and there are an increasing number of DE&I focused funds
- Through putting their own house in order, and ensuring they have their own clearly defined DE&I strategies and assess and externally verify their DE&I performance and
- Through investment stewardship, where they take on a fiduciary responsibility as ‘stewards’ for their clients’ assets and ultimately as shareholders of large organizations. They are then committed to the long-term, focused engagement and constructive dialogue with the companies they are invested in
‘Investment stewardship’ and ‘fiduciary duty’ are important concepts, where an institutional investor is required to incorporate all value drivers, including ESG factors, in investment decision making, and undertake direct engagement and proxy voting with companies on matters that have a perceived material impact on financial performance. Ultimately investors’ voting strength can directly impact the future direction an organization takes. Data from the UN Principles for Responsible Investment (UNPRI), for example, suggests that the number of ESG resolutions being filed in the main markets has increased from 499 in 2021 to 576 so far this year, and these cover an increasing diversity of ‘S’ topics.
The number of DE&I-related workforce resolutions specifically has tripled, taking it to the number two spot after climate change according to the UNPRI. Interestingly, there were also a record number of proposals that were submitted but then subsequently withdrawn, which could be interpreted as meaning that shareholders have been able to reach agreement with a company’s Board before the issue is raised formally at the AGM.
Institutional investors are therefore having a significant impact on the way their invested companies address issues relating to DE&I, holding them accountable for their behaviours. COVID has also accelerated the speed with which ‘social’ topics are being brought forward by investors: a record number of women are falling out of the workforce due to COVID; record numbers of minorities have also lost their jobs, and investors want to know what actions corporates are taking to redress the balance. This extends to information on initiatives to mitigate sexual harassment and discrimination, since harassment and bullying have also increased during COVID times.
Social topics were historically raised at AGMs by niche activists, and seen as an irritation caused by those with little power, but are now being raised by the major institutional investors with louder voices and higher visibility – Black Rock, Vanguard, State Street, UBS, Allianz among others – who recognise the DE&I risks and their potential impact.
Regulation And Standards
In the background to the whole issue is a link to regulation and standards.
Regulation is emerging – including Nasdaq’s regulation on Board diversity disclosures, that will demand greater transparency in the composition of Nasdaq-listed issuers in an initiative to increase gender and racial diversity. Similar DE&I related regulations are emerging across Europe. But beyond the boardroom, investors are increasingly interested in the broader composition of the workforce, and exposing firms – intentionally or otherwise – for having no absolute, disclosed or externally verified numbers to support their claims of employing diverse talent.
Voluntary ESG and DE&I reporting still lacks harmonized standardization to help companies identify, manage and communicate on material issues to their investors and wider stakeholders. Companies and investors are leaning on the myriad of internationally-recognized global standards and frameworks that range from those covering a broad ESG scope (such as GRI, SASB, ISSB) to single issue topics in greater depth and granularity (such as the EDGE Certification Standards). The most savvy investors are actively implementing these Standards and Certification systems in-house to more effectively understand the different impacts of ESG and DE&I-related topics, and to better serve their investment beneficiaries.
Investor Stewardship is an opportunity for investors to really make a difference in the DE&I space, but they need to know the right and relevant questions to ask and to recognise leading practice when they see it, or else they themselves may stand accused of simply ticking a box, with no genuine interest in the outcome.