The ESG-DEI Overlap

How diversity, equity and inclusivity can accelerate your bottom line.

The demand for environmental, social and governance (ESG) factors to be considered in the way corporate profits are earned and portfolio returns are generated continues apace.  However, the emphasis has primarily been on the environmental and governance components, with less attention devoted to the social aspects within ESG, and specifically the all-important people component relating to a firm’s internally-focused diversity, equity and inclusivity (DEI) practices.

At a recent Satrix IndexMore webinar – hosted in collaboration with BlackRock - Fikile Mbhokota, CEO at Satrix Investments said, “The current environment has contributed to investors wanting more sustainable products and favouring organisations that demonstrate commitment to ESG factors; these investors want companies that optimse their returns while delivering socioeconomic impact.” 

It has, however, become increasingly clear that delivering on measures such as employee wellness and equitable access to jobs helps firms to improve their “S” scores as well as deliver a more productive and motivated workforce, both of which contribute favourably to the bottom line.

This is one of the principle reasons why Satrix decided to launch its Satrix Diversity & Inclusivity ETF, which offers investors cost-effective exposure to 30 companies that lead the market insofar as incorporating DEI within their cultures and strategies. “Diversity matters, inclusivity wins,” said Mbhokota. “By including employees from diverse backgrounds, and integrating these employees at all levels, a firm is more likely to outperform its peers on critical measures such as profit, resilience and sustainability”. More importantly, embedding diversity and inclusion in its culture gives a firm a head start on its ESG ratings journey.

It can be difficult for business leaders to appreciate the impact of diversity and inclusion on performance, let alone investors. To illustrate, consider this comment made by Carice Anderson, Director of People Manager Strategy at Blackrock. “Research supports that people managers account for up to 70% of variance in team performance, so, if we want to talk about where can we get the most bang for our buck, it is investing in people managers – they are the ones who drive performance; create an inclusive environment; and shape the experience and perception of other employees”. Anderson was a member of the IndexMore panel discussion. 

The JSE, which is the largest bourse in Africa and the 17^th largest in the world, is outperforming with regards to gender diversity, under the leadership of its second successive female CEO, Leila Fourie. The JSE boasts 60% black, 60% female representation at board level and 70% black, 80% female representation at the executive committee level. A recent report published by SSEInitiative.org suggests that many local firms are following the JSE’s example. The report identified the JSE as the only developing market exchange to beat the G20 country average for female representation among directors of listed companies, with women occupying 29% of the board seats at the top 100 JSE-listed companies compared with an average of 20% on major G20 exchanges. South African women chaired 11% of these companies, beating the G20 average of 5.5%. 

Listing requirements have been held up as a possible way to drive DEI outcomes; but it should be noted that such requirements are already implied or suggested through the King IV ™ Code of Corporate Governance. “From a sustainability perspective, the JSE has included the provisions of the King Code into the listings requirements, which companies need to look at on an ‘apply and explain’ basis… there are, however, two things on the social agenda that are now part of mandatory governance disclosures,” said Shameela Soobramoney, Chief Sustainability Officer at the JSE. The first requirement is to promote broader diversity at board level, and the second is that companies put their remuneration policies to the vote, annually.

Rachel Jafta, Professor in Economics at Stellenbosch University and Director at Naspers and Prosus, said that firms need to ensure a diverse pipeline of new hires in addition to building up an understanding of the experience profile attaching to each employee. This fact-finding must go beyond degrees and qualifications to include life and work experience, among other diversity factors. Her comments were reinforced by Anderson, who believes that human resources experts should “seek to empower professionals to reach their full potential and to democratise access to the unwritten rules of success, so that people can have more fun, better relationships and greater impact at work”.

Hiring the right employee is just one part of integrating DEI within a firm’s culture and strategy. “There is no doubt that integrating DEI into your corporate strategy will make a huge difference to all employees, from the ground up,” concluded Mbhokota. “We expect that equitable and inclusive principles will have a positive impact on workforce performance and company results, and as such there is excess return on offer to investors that seek out and invest in DEI-focused opportunities”.

Disclosure

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