DIVERSITY, equity and inclusion (DE&I) are closely linked values held by organisations that support different groups of individuals across races, ethnicities, religions, abilities, genders and sexual orientation, and also across their employees and communities.
Rather than a feel-good concept to enhance the corporate image, DE&I brings tangible benefits to companies, especially over the long term. Companies that fare well in this area have been found to experience greater innovation, higher employee engagement rates, greater outperformance and in turn, higher profitability.
What is diversity, equity and inclusion?
Diversity, as represented in the workforce, includes 1) gender diversity, 2) age diversity, 3) ethnic diversity, and 4) physical ability and neurodiversity.
Equity, on the other hand, refers to fair treatment for all people, so that practices in place ensure that identity is not predictive of opportunities or workplace outcomes. This is different from equality, which assumes that all people should be treated the same. Equity takes into consideration a person’s unique circumstances, adjusting the treatment accordingly so that the end result is equal.
Finally, inclusion refers to how the workforce experiences the workplace and the degree to which firms embrace all employees.
DE&I is among the key environmental, social and governance (ESG) factors to determine a company’s social and governance standing for investors and customers. Beyond enhancing a company’s public image, DE&I can bring tangible benefits to companies.
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Why DE&I matters
DE&I factors can be incorporated by analysts in their fundamental research into companies as a driver for longer-term outcomes. Share prices of companies which fare well on this front have outperformed the broader markets over the longer term.
Why is this the case? Based on numerous studies over the years, there is evidence that DE&I results in greater innovation, higher employee retention rates, greater outperformance and in turn, higher profitability.
MSCI ESG Research has been tracking and reporting on board gender diversity since 2009. Based on the 2,811 constituents of the MSCI All-Country World Index (ACWI) as at last October, the number of board seats held by women went up 1.9 percentage points to 24.5 per cent in 2022, a moderate improvement despite the Covid-19 pandemic and its threat to undo gender diversity progress.
In Singapore, based on the latest study by the Council for Board Diversity, the proportion of women appointed directors to the boards of large listed companies reached a record high last year, accounting for 36 per cent of all director appointments of the top 100 companies on the Singapore Exchange.
The appointments raised women’s participation in directorships of the largest 100 companies to 21.5 per cent at end-2022, up strongly by 2.6 percentage points, from 18.9 per cent at end-2021.
Impact bond investing – is orange the new green?
Diversity and inclusion are correlated with business and financial performance. Diverse workforces are more likely to drive a competitive advantage across talent, innovation and markets, and outperform over the long term.
The sustainable finance market has grown significantly over the years. But compared to other segments of thematic investing such as climate change, gender-lens investing is still in its infancy, with only US$17 billion in gender-labelled financial products out of over US$40 trillion in the global sustainable investment universe in 2020.
The global debt and loan capital markets (via social, gender, sustainability, and sustainability-linked bonds and loans) are potential channels through which capital can be directed towards reducing gender inequalities and embracing inclusion.
Achieving the United Nations’ Sustainable Development Goal (SDG) 5: Gender equality has the potential to positively impact several other SDGs such as ending poverty (SGD1); eliminating hunger (SDG2); ensuring health and well-being (SDG3); ensuring inclusive and equitable quality education (SDG4), promoting sustained and inclusive economic growth (SDG8) and reducing inequality within countries (SDG10).
The Covid-19 pandemic has disproportionately impacted women, widened the gender gap and made the case for gender financing even more critical.
With less than a decade to go achieve the 2030 SDGs, financing solutions that drive gender equality should be accelerated. Besides gender-labelled bonds, social bonds are also good avenues to finance projects targeted at low-income groups, persons with disabilities, sexual and gender minorities, or other groups.
Aligned to SDG5, gender bonds are debt instruments which integrate gender considerations into their objectives with the purpose of raising awareness of gender inequality and empowering women.
In March 2022, the Development Finance Corp (DFC) in the US partnered other international organisations to issue a set of guidelines, called the Orange Bond Initiative, which aims to empower 100 million women and girls worldwide by unlocking US$10 billion in capital by 2030.
Consequently, the Orange Bond Principles and first “orange bond” were introduced in October 2022 and December 2022, respectively. Proceeds from orange bonds must go to projects and enterprises that substantially benefit women or gender minorities, ensure a gender equitable workforce and/or inclusive value chain, or are majority women-owned or led.
Issuers of the bonds must maintain substantial gender diversity in their leadership team or the team working on the bond.
For this asset class to gain more prominence from its current niche status, increased sovereign issuance of gender bonds and incorporating gender characteristics into the mainstream green bonds could be ways to progress towards gender equality and realisation of SDG5.
What this means for investors
As investors consider ESG factors as drivers of returns and indicators of risks for their portfolio investments, DE&I considerations can provide valuable insights into how companies are able to deliver sustainable sources of value.
Over the long run, companies that lead their respective industries in DE&I aspects may produce more sustainable business results, and at lower risks than peers that lag in these areas.
The writer is chief investment officer and head of portfolio management and research office, Bank of Singapore.
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