Despite DEI and ESG overlapping, firms are treating them differently.
By Isabel Ruiz Halter, Director – Global Real Assets at Sheffield Haworth
Following some recent events and roundtables I attended featuring leading lights from the global real assets industry, it is interesting to track the current trends within that market relating to diversity, equity and inclusion (DEI) and environmental, social and governance (ESG).
Despite the crossover between these two topics, it seems clear that companies in the sector are treating them separately. Why is this? What difference is this likely to make in the way organizations develop their DEI and ESG policies and priorities? To what extent are companies linking ESG or DEI performance to financial remuneration?
Firms are treating DEI and ESG differently, and here is why
Speaking with human resources leaders and other senior executives at real asset companies and funds, many companies are appointing separate heads of ESG and heads of diversity. On the surface, this makes little sense, since the “S” – or social – element of ESG also incudes diversity.
Dig a little deeper, however, and there are a few reasons why companies are treating them separately, and these reasons make sense. The first is that most companies interpret ESG to mean environmental sustainability. This may seem short-sighted, but with increasing regulatory obligations in this area, companies have a lot of work to do to manage sustainability.
It’s high on the global agenda and it’s a legal obligation in most major markets to do something, whether that’s companies needing to report on their sustainability impact or look more closely into the sustainability of the assets in which they invest.
This on its own is a full-time job. At the same time, while firms face fewer regulatory obligations with regard to DEI – beyond avoiding discriminating against under-represented social groups – making a positive impact in this area is both a strategic and PR priority. Being more diverse is increasingly important for winning business, to satisfy shareholders and other stakeholders, and for maintaining a strong public reputation.
Clearly, this is also a full-time job. So it makes a lot of sense to appoint someone dedicated purely to this also.
What DEI goals are firms setting?
From the conversations I’ve had with leaders in the sector, one of the principle focuses for DEI policy remains improving gender parity.
For example, many firms still hire more men than women, even at the junior level. Many also struggle to promote women into more senior positions at the same rate as men.
Many companies are looking at fostering the internal promotion of women. Ways to achieve this include more sponsorship, training and mentorship for promising female candidates. Another method is to train middle managers in the value of fostering and promoting female talent.
A third way is to try and move beyond the traditional focus when hiring of looking for ‘plug and play’ candidates – those with experience who can hit the ground running with minimal disruption. Such candidates still tend overwhelmingly to be men.
Therefore, increasing gender parity would include taking longer over the hiring process, looking for a more diverse slate of candidates, trying to remove unconscious bias from the recruitment process, and potentially offering support to internal female candidates to apply for more roles.
Should firms be rewarded or punished for hitting or missing DEI targets?
Another DEI policy some firms are pioneering is tying bonuses to DEI objectives. Although this is still rare within the real assets sector itself, large corporates in other sectors such as McDonald’s and AMEX are pioneering this approach, and some senior leaders within real assets are discussing whether they should apply the same idea.
Certainly, adding a financial incentive to increase gender parity – and diversity more generally – seems like a good idea. It is especially important for firms to consider this now before other sectors take the lead, as this could negatively affect the sector’s reputation for taking DEI seriously, thereby making it even harder to attract skilled and diverse talent.
At the same time, it’s becoming clear that regulators are starting to take more of an interest in DEI, and how they can help promote it. In the UK, for example, the financial regulators have published a discussion paper on promoting diversity and inclusion across the entire financial services sector. Experts there expect binding regulatory obligations to follow within 18-24 months.
Given the importance of financial services to the UK economy, where this sector leads, others will be sure to follow.
What steps should firms take now on DEI and ESG?
When it comes to sustainability, firms have an advantage in that regulators are taking a close interest, passing new laws, and looking at other ways to set targets. In that sense, becoming more sustainable is easier, since goals are being handed down externally that firms will have no choice but to comply with.
When it comes to DEI, the task is more difficult. No major market yet has binding guidance or targets on what to achieve in this area. This means that companies have to take the initiative, and this is much more difficult.
There are some potential steps firms should consider taking, based on current discussions in the sector, however. These include:
- Consider tying bonuses to DEI objectives.
- Look to DEI pioneers in other sectors for policies to model in your own firm.
- Look more broadly than gender or ethnicity, and be sure to include age, LGBTQ+ representation, social background and neurodiversity.
- Look into the business case for increasing diversity to get C-suite buy-in and support.
- Since the UK financial services sector is pioneering possible regulation in this area, keep up to date with the debate there. A good start is to download the current discussion paper from the UK financial regulators.
- Think about how to attract talent from more diverse backgrounds and from other industries.
- Get involved in events, roundtables and other discussions on the subject to help guide the conversation and learn from others.
Above all, it’s important to take DEI seriously, and to be willing to try new ideas. The debate is still at a relatively early stage and no one yet has all the answers when it comes to solving the various challenges involved. Taking action early will put you ahead of the game, and make you more appealing to diverse talent when you need it – as well as more appealing to other candidates and potential clients who also value diversity.