From gender, and racial equality to queer inclusion, they have the potential to call the shots for a holistic approach towards diversity, equity, and inclusion in the organizations. A growing number of venture capitalists are influencing the DEI agenda in their investee companies.
There is a definitive ask by investors in the US to disclose annual data based on race and ethnicity, gender, job category, and, as of recently, pay equity, using the U.S. Equal Employment Opportunity Commission’s (EEOC) EEO-1 form.
Similarly, in Asian markets where there has been an increase in private equity and venture capital (VC) funding, limited partners have begun seeking questions about diversity, and data on DEI from general partners.
In India, Avtar and Seramount’s BCWI-MICI, an analytic exercise of measures and policies in place across India Inc. to support women’s workforce participation and the different strands of diversity—generation, sexual orientation, disabilities, etc.- offers a metric-based analysis of their impact. The BCWI-MICI study reflects the DEI intentionality of companies as they synergize their business goals with the DEI agenda.
Globally, the overarching responsibility towards gender equality has been through efforts for accomplishing Sustainable Development Goal 5. Focusing on gender equality is among the 17 Sustainable Development Goals established by United Nations in 2015.
The 17 SDGs recognize that action in one area will affect outcomes in others and that development must balance social, economic, and environmental sustainability.
Why is it necessary?
The UN-sponsored Principles for Responsible Investment (PRI) paper, which was published recently, has covered several reasons for VCs to invest in DEI among their investees.
Legal and regulatory: The PRI report says that countries across the world have come up with legal measures to ensure businesses invest in social good. There are DEI-specific ones like those mandating employment of persons with disabilities, and a gender-balanced workforce. For eg., India’s Rights of Persons with Disabilities Act is in line with the principles of the United Nations Convention on the Rights of Persons with Disabilities and encourages establishments to have an accessible and discrimination-free workplace. Apart from these, there are financial regulations like the ones introduced by NASDAQ Stock Exchange seeking the US Security Exchanges Commission to introduce a listing rule to include disclosures around board diversity.
Risks and opportunities: The paper notes that ‘strong DEI within a company can positively affect decision-making, levels of employee engagement, reputation amongst stakeholders, innovation, and access to untapped markets. There are also significant risks in failing to improve or ignoring DEI: for example, studies in the US show high incidences of sexual harassment can impact market performance, profitability, as well as staff productivity and turnover.’
The S in ESG
Non-financial factors like ESG stands for Environmental, Social, and Governance, enable the assessment of material risks and growth opportunities. The social part covers the DEI focus for companies, making it an important yardstick.
The same paper notes, “Gender diversity is also said to lead to better identification of key ESG issues as critical to corporate strategy by the board. Diversity within investment organizations can also reduce conduct risk; prevent risky over investment decisions; result in fewer instances of fraud and fewer financial reporting mistakes and controversial business practices.”
Some have taken the ESG a step further by adding D for diversity -ESGD— as it seeks to prioritize diversity and justice for a more inclusive society. ESGD investing is about investing consciously by adopting resources to reduce inequalities for the underrepresented and removing barriers. ESGD is not just good for business but also for society.
The Securities and Exchange Board of India SEBI has introduced the Business Responsibility and Sustainability Reporting or BRSR for the top 1000 listed companies (by market capitalization).
Going beyond the data collected, BRSR stresses the need for an organization to commit to sustainability and demonstrate it to the interested parties in a transparent manner.
What can investors do?
The PRI paper notes that “Alongside driving DEI through their portfolios, investors should address DEI within their internal activities which requires action across recruitment, retention, development and promotion practices, including pay policies.”
Screening: “Investors can apply DEI-related filters to potential investees to rule out the worst performers or include those investees and engage with them, demonstrating leading practice. Screening criteria for potential investees may include disclosure on DEI metrics, a diversity policy or a minimum level of diversity within the workforce, as well as disclosure and resolution of DEI-related grievances.”
What can companies do?
Be transparent: By being upfront about their data on policies, practices, and outcomes related to workforce composition, promotion, recruitment, and retention rates, as well as pay practices, companies can stress their intentionality around the DEI goals.
Take meaningful action: Investors are bound to back companies when they show willingness in thoughts and action to address the broader areas of diversity.
Develop strategies: BSR, an impact-driven sustainability organization that works with a global network of leading companies, suggests companies “respond to these investor interests by developing clear DEI strategies, integrating them into their core business, developing cross-functional communications between sustainability teams, human resources, investor relations, and the C-suite and board of directors, and, not least, engaging their investors.”
It is evident that companies have to spell out their DEI agenda with a roadmap– integrating them into their core business, linking their human resources, investor relations, and the C-suite and board of directors, and engaging their investors.
