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ESG Investors Note Lack Of Data On Diversity

What’s happening? Companies in the US are better than their European or Asian counterparts at compiling data on racial diversity for ESG investors, but remain reluctant to share the information, according to analysts. S&P Global said only one-third of firms it assesses internationally made such data public, while in some cultures discussions of race or ethnicity are deemed "taboo". 

Why does this matter? A key point to note here is the regional nuances that exist within diversity disclosure levels. This is partly due to differing business cultures, but also historical factors. Amid growing efforts to reconcile regional differences in ESG data reporting and integration, this issue becomes particularly significant. 

While Europe is often a centre for ESG activism, certain European governments including France and Germany have prohibited the collection of ethnicity and racial data.  Meanwhile, in Asia, there has been a nascent acknowledgement of the relevance of social factors for investors. The majority of companies in China report insufficient ESG metrics to show whether they qualify for sustainability-focused funding, according to Bloomberg data.

This has significant repercussions – China could potentially miss out on the over $30tn global ESG investing market. The ESG and diversity data gap is also exacerbated by discussions on racial differences remaining “somewhat taboo in many Asian countries”, according to Stephanie Creary at the University of Pennsylvania.

While investors in US companies do have access to more transparent diversity data, there are still hurdles to address. First, there is no requirement to publicly disclose this information. Second, when this is shared it is often in relative rather than absolute figures which can obscure the full picture. 

So what are the key solutions to address these nuances? One example is MSCI’s Workforce Gender Diversity Data Methodology, which aims to restrict companies from “gaming the system” by selectively reporting statistics skewed in their favour. By applying a discount to the diversity scores of companies with limited disclosure, it aims to provide more objective standardisation. 

Lateral thought from Curation – Another question is whether to adopt universal ESG standards or acknowledge regional variances. This applies (as detailed above) to diversity improvements but also to what is deemed an environmentally sustainable activity – which will also vary geographically and over time.

The former approach would allow for more standardisation, which would help with benchmarking and comparing companies’ ESG and diversity performance. This would be especially useful for investors, which often face the challenge of a lack of consistent ESG data. However, it is difficult to have a one-size-fits-all approach, given different cultural factors and disclosure policies. Nevertheless, global regulatory bodies such as the International Organisation of Securities Commissions are seeking to harmonise the regional and sectoral differences in ESG disclosure standards. 

While there is a growing trend towards increased diversity and ESG disclosure, how to adopt a framework for this that both accounts for nuance while providing meaningful information to investors will be a key issue to address in the coming years.

Nick Finegold is Founder & CEO of Curation Corp, an emerging and peripheral risks monitoring service.


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