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Social Commitment Is an Inextricable Part Of ESG

Social Commitment Is an Inextricable Part Of ESG 1

In the wake of the horrific death of George Floyd on May 25, thousands of people hit the streets of the United States, carrying placards reading Black Lives Matter – igniting a movement that has since spread to other countries and gained support from many public figures. While the issue of racial inequality is not new, the flurry of reactions from the usually reticent corporate sector is.

In a recent report, S&P Global Ratings says it believes racial injustice is now becoming a material issue that has the potential to change its ESG Evaluations and credit perspectives. In the report, primary analysts Neesha-ann Longdon, Caitlin Harris, and Dimitri Henry, explore how the impact of the George Floyd protests, and the wider Black Lives Matter movement, have manifested for businesses in recent months.

To assess a company’s social profile in our ESG Evaluation, we gauge a company’s effectiveness in developing a long-lasting, productive, and inclusive workforce, including through diversity, recruitment, and people management policies. We consider four key factors–workforce and diversity, safety management, customer engagement, and communities–to determine how well an entity is managing its exposure to these social risks and opportunities compared with sector peers globally (see “Environmental, Social, And Governance Evaluation Analytical Approach,” published June 17, 2020, on RatingsDirect).

In our opinion, a company that builds up strong social credentials can maintain its consumer base, thereby supporting stable revenue streams. This year, social issues have taken the spotlight, starting with the COVID-19 pandemic and moving to social injustice (see “The ESG Pulse: Social Factors Could Drive More Rating Actions As Health And Inequality Remain In Focus,” published July 16). Carried along by social media, interactions between companies and the general public are becoming highly visible, providing a platform for stakeholders to demand that companies take decisive action to address racism.

Consumers Are Increasingly Demanding Change

As the Black Lives Matter movement rolls on, social media has given companies keen insights into customers’ evolving behavior and preferences. Major brands are uniquely positioned to influence people’s mindsets globally. With this in mind, a younger generation of consumers–including Generation Z and millennials in their 20s and 30s–is taking a leading role in the movement, calling on companies to take a stand. Through social media, some consumers are using their collective voices to hold companies accountable for not only their words but also their actions or inaction. They want companies to make a financial investment to enhance diversity and inclusion, combat pay inequality, and support anti-racism initiatives, thereby addressing practices or policies that might be perpetuating racism in its many forms.

Chart 1

Support for black lives matter movement surges after George Floyd’s death registered voter net support in the U.S.

Social Commitment Is an Inextricable Part Of ESG 2

This emerging consumer base of socially aware individuals may influence how businesses are perceived in the market, and corporations are taking notice. Companies are increasingly aware that failure to maintain stakeholder buy-in can lead to a loss of market share, which can affect credit quality in the long term. For example, a DeVries Global survey (published June 2, 2020) of 1,000 Americans found that more than 62% of respondents under the age of 35 said they will be “doing more research on brands and their inclusivity practices before purchasing.” This implies companies that publicly demonstrate such practices may benefit from satisfying their customer base. To illustrate, after sportswear giant Nike launched its 2018 campaign featuring NFL quarterback Colin Kaepernick, its sales increased and its stock price reached an all-time high. Kaepernick controversially knelt during the national anthem before a 2016 game to protest against police brutality and became a free agent the following season.

In our opinion, the Business Roundtable’s revision of its Statement on the Purpose of a Corporation to, promote “an economy that serves all Americans,” demonstrates the recognition that a company should do more than appease shareholders; it should instead aim to balance the interests of all stakeholders, including customers, employees, and local communities. More corporations are realizing that, by rethinking recruitment and talent management strategies, they can set themselves apart from competitors and reinforce customer loyalty. This is especially true in today’s recessionary environment amid subdued consumer spending.

We believe a company’s transparency and communication will play a critical role in maintaining customer satisfaction, one of the performance indicators we assess under customer engagement in our ESG Evaluation, as consumption habits evolve with the changing situation (see “The ESG Lens On COVID-19, Part 1,” published April 20, 2020). At the end of the day, companies that are able to respond swiftly to customers’ demands and take concrete actions to meet their stated social objectives may come out on top.

Investors Are Raising Their Voices

Investors are increasingly leveraging their ownership interests to push companies to display greater transparency and accountability regarding diversity. Companies are at risk of losing future investments if they do not address investors’ mounting concerns regarding racial injustice. There are other compelling reasons for companies to take a hard look at their business practices. The results of a 2019 McKinsey study make a case for diverse corporate cultures; the findings show that the profitability of companies in the top quartile for ethnic diversity was 36% higher than for those in the bottom quartile.

Moreover, diversity and labor issues have a prominent spot on the agenda this year at annual general meetings, where investors file and vote on topics they want companies to address. As an example, on Juneteenth (June 19, 2020), the annual holiday commemorating the end of slavery in the U.S., around 70% of investors in network security firm Fortinet voted in favor of a resolution to request the release of quantitative diversity data. Votes carrying resolutions on workforce management issues are also becoming more common. Similar shareholder motions filed at companies like Gilead Sciences, Morgan Stanley, and Mastercard were withdrawn before the annual meetings, once companies had committed to improving the reporting and disclosure of diversity data. This demonstrates how investor pressure can also lead to corporate action.

Consumer Goods and Financial Firms Are Among The First Responders

Corporates and financial institutions are facing closer scrutiny from stakeholders on their social record. In our view, companies that engage meaningfully with stakeholders, and integrate social inequality solutions into their decision-making and strategy, will be in a better position to safeguard their reputations. We consider such factors as part of the preparedness assessment in our ESG Evaluation.

Reactions to the Black Lives Matter protests from corporates listed on the S&P 500 index suggest that customer-facing companies in the consumer goods and financial institution sectors were the first to respond as of June 25 (see chart 2); 43% or 217 of the S&P 500 companies have issued one or more public statements. This could imply that these sectors are under greater pressure to openly show support for equality and align their actions with stakeholders’ values. On the other hand, sectors such as energy, industrials, and materials are lagging in their responses.

Chart 2

consumer goods and financial services sectors dominate S&P 500 company responses to George Floyd’s death.

Social Commitment Is an Inextricable Part Of ESG 3

Perceptions of Corporate Actions Carry A Significant Risk Of Alienating Stakeholders

The pressure on big brands is coming from many directions. Missteps on social issues, especially compared with peers, expose corporate entities to the risk of angering customers and sometimes even their own employees. From an ESG perspective, this could lead to lower employee and consumer satisfaction. However, in the longer term, such mistakes could have material financial and reputational repercussions.

For example, on May 30, 2020, Adidas retweeted rival competitor Nike’s digital campaign urging action against racial injustice after George Floyd’s death. Adidas quickly faced criticism from its employees, who claimed the athletic sportswear giant does not do enough to ensure accessibility or opportunity for people of color. The employees called on executives to increase the number of Black and Latino employees across all levels of the organization and demanded an internal investigation into whether race-related issues in the workplace are being adequately addressed. This ultimately led to organizational changes, including the Chief Human Resource Officer’s departure from the company on June 30. Adidas has since doubled down on its promise to combat the broader issues of racial injustice in communities. It has increased its financial donation to

Black communities to $20 million, committed to a minimum of 30% of all new positions in the U.S. being filled by Black and Latino people, and financed 250 university scholarships for Black students over the next five years.

While, traditionally, these types of internal grievances would be managed behind closed doors, the effect of the Black Lives Matter movement is shifting these discussions onto the public stage, aligning employee demands with customers’ expectations. The Adidas case is a clear example of how internal and external stakeholders can take a company to task on its social commitment. From an ESG perspective, it gives us a glimpse into possible consequences for a brand’s image, and customer and employee loyalty, if companies fail to take what stakeholders perceive to be appropriate and effective action.

Many leaders of U.S. financial institutions, including banks and asset managers, have made public declarations of solidarity with the Black Lives Matter movement and against racism. Like their consumer goods counterparts, banks have made financial donations, but several have also been called out on previous allegations of discriminatory lending practices. According to data from the U.S. Federal Reserve, black-owned firms are more likely to apply for bank loans, but less than 47% of these applications are approved. At the individual level, a McKinsey study found that Black Americans are significantly more likely to be rejected for loans than white borrowers (28% and

11% respectively) or charged higher interest rates. A 2019 study by Berkeley Haas Business School also found that African Americans and Latino customers are charged higher interest rates than white customers with similar creditworthiness, by both face-to-face and online lenders.

Such instances of racial profiling are gaining the public’s attention, with repercussions. Large U.S.

financial institutions have paid huge fines over the years in relation to discriminatory lending practices: Bank of America’s Countrywide Financial unit paid $335 million in 2011 to settle charges of lending bias; JPMorgan Chase paid $55 million to settle a lending discrimination lawsuit in 2017; and Wells Fargo & Co agreed to pay $175 million in 2012 for charging higher interest rates and fees to African Americans and Latino customers in 2012, and $10 million in 2019 on similar charges.

How Corporates Are Backing Words With Actions

Public displays of corporate solidarity with the Black Lives Matter movement abound, mainly as a result of stakeholders’ calls for companies to more actively oppose racism. Ensuring that talk is leading to action is essential for companies to demonstrate that social values are embedded in their businesses’ DNA. Companies are using a variety of mediums to express their commitment to the movement but each comes with reputational and financial implications, both positive and negative.

Social media provides a huge global audience

Companies have been widely using social media platforms–including Twitter, Facebook, and Instagram–to connect with customers and communities and state their commitment to change. Media responses range from statements from CEOs and executives, promoting Black brand ambassadors, and launching anti-racism marketing campaigns, to directly calling out consumers that make racist remarks. Brand activism has become popular: A number of global brands–including Disney, Amazon, Unilever, Saatchi & Saatchi, and Netflix–have also released statements condemning racism and injustice on various social media channels.

Global brands have been lauded for publicly addressing racism head on, but not by everyone. Companies’ media statements have also attracted criticism, in particular regarding their handling of previous allegations. For example, French beauty products company L’Oréal has come under fire after stating its support for the Black Lives Matter movement, in part due to its dismissal of black model Munroe Bergdorf–the brand’s first transgender model–in 2017 for her comments about the “Unite the Right” rally in Charlottesville, Virginia. Social media channels allow businesses to reach an extensive audience but carry significant reputation risk, since users can directly and publicly question companies’ values and commitment to inclusive workplaces.

Companies have donated millions of dollars to nonprofit organizations

One concrete form of action is financial contributions to Black Lives Matter chapters, national and regional charities, and legal defense funds, among others, aiming to highlight and address reports of police brutality. Some of these organizations are aligned with the American Civil Liberties Union Foundation, the NAACP Legal and Educational Defense Fund, and the Center for Policing Equity.

Large corporate donors include the top 10 companies on the S&P 500 Index, such as Apple, Johnson and Johnson, Pepsi, and Bank of America. However, such financial commitments are also under scrutiny. Donation size is seen as an indicator of a company’s true commitment and is often benchmarked against its market capitalization and the donations of peers.

Organizational policies and structures are changing

Some companies have gone a step further. We’ve seen changes to corporate structures and operations, more inclusive hiring practices, a shift in board composition, and diversity initiatives. Marks & Spencer’s CEO, Steve Rowe, for example, has reportedly committed to taking “urgent” action to address racism and diversity as part of a comprehensive review of the company’s diversity and inclusion approach. The aim is to expose policies and practices that maintain inequality in the workplace and drive the business culture toward a more diverse and inclusive model.

Changes to a company’s organizational structure are a less common response, but pressure is mounting. For instance, Matthew Fell, Chief U.K. Policy Director at the Confederation of British Industry, suggests that companies with historical links to the slave trade should regard their past as an important starting point to begin to address the systematic racism that leaves Black and other ethnic minority groups disadvantaged in the workplace. Ethnic minorities comprise approximately 14% of the U.K. population but make up only 8% of boardroom directors. Recognizing how historical foundations have preserved racial biases may foster more inclusive workplaces, which would likely translate into positive ESG benefits through an improved corporate culture.

Companies Need to Be SMART About Diversity And Inclusion

In the weeks following George Floyd’s tragic death, corporate giants have made anti-racism pledges. However, the controversial issue of police brutality that disproportionately affects Black Americans, and systemic racism, have been with us for some time. We believe corporates’ recent reactions to the wave of protests against racial discrimination, particularly on social media, signify their willingness to take on more social responsibility. But we believe that what really matters is how and when they do so.

If companies’ policies are to have an impact, they must be specific, measurable, achievable, and time bound (SMART), following widely accepted goal-setting criteria. Progress must also be transparent, particularly as labor markets become more competitive. The relationship between companies and their stakeholders is moving away from being based solely on financial interests or demand and supply. It has been infused with a social conscience.

Although it is too soon to tell whether recent events will have a lasting impact, we believe racism and other forms of discrimination are becoming increasingly relevant to investors and consumers. We expect that companies recognized as having inclusive workplaces and employing socially responsible business practices could eventually have a credit advantage versus competitors. They will also measure up positively against their peers in the eyes of stakeholders, who will be hoping this change occurs in the near, rather than distant, future.

Related Research

  • The ESG Pulse: Social Factors Could Drive More Rating Actions As Health And Inequality Remain In Focus, July 16, 2020
  • Environmental, Social, And Governance Evaluation Analytical Approach, June 17, 2020
  • Environmental, Social, And Governance: How We Apply Our ESG Evaluation Analytical Approach: Part 2, June 17, 2020
  • How We Apply Our ESG Evaluation Analytical Approach: Part 2, June 17, 2020
  • People Power: COVID-19 Will Redefine Workforce Dynamics In The Post-Pandemic Era, June 4, 2020
  • The ESG Lens on COVID-19, Part 2: How Companies Deal with Disruption, April 28, 2020
  • COVID 19: A Test Of The Stakeholder Approach, April 21, 2020
  • The ESG Lens On COVID-19, Part 1, April 20, 2020
  • How To Navigate The ESG Risk Atlas, April 11, 2019
  • How We Apply Our ESG Evaluation Analytical Approach, April 10, 2019
  • The ESG Advantage: Exploring Links To Corporate Financial Performance, April 8, 2019

External Research

  • Business Roundtable https://opportunity.businessroundtable.org/ourcommitment/
  • The Fed “Availability Of Credit To Small Businesses,” https://www.federalreserve.gov/publications/2017-september-availability-of-credit-to-small-businesses.htm
  • McKinsey “The Case For Accelerating Financial Inclusion,” https://www.mckinsey.com/~/media/McKinsey/Industries/Public%20Sector/Our%20Insights/The%20case%20for%20accelerating%20fin
  • “Consumer-Lending Discrimination in the FinTech Era,” Nov. 2019, Haas School of Business, UC Berkeley, https://faculty.haas.berkeley.edu/morse/research/papers/discrim.pdf
  • “Building An Inclusive Future, Together,” June 2020, Marks and Spencer, https://corporate.marksandspencer.com/steve-rowe-building-an-inclusive-future-together
  • Countrywide Financial Corp. settlement with U.S. Department of Justice, https://www.justice.gov/opa/pr/justice-department-reaches-335-million-settlement-resolve-allegations-lending-discrimination
  • Wells Fargo Settlement with U.S. Department of Justice, July 2012, https://www.justice.gov/opa/pr/justice-department-reaches-settlement-wells-fargo-resulting-more-175-million-relief
  • https://www.theguardian.com/business/2020/jun/18/uk-firms-slavery-links-racism-cbi-reparations-greene-king-lloyds-of-london

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Trust matters more than ever in an uncertain world

Trust matters more than ever in an uncertain world 4

By Zac Cohen, COO, Trulioo

Trust in the time of COVID-19

Perhaps more than ever before, retail and investment banks the world over face a pivotal moment in their evolution, as banking transitions from a digital-first towards a digital-only landscape. The COVID-19 pandemic has put severe restrictions on traditional face-to-face or high street banking and forced sections of society that had previously been resistant to or unable to access digital banking to make the shift. This understandably brings with it significant anxiety and fear.

For an industry that has been striving to rebuild consumer confidence since the global financial crisis of 2008, COVID-19 presents a huge challenge. It needs to foster trust at a time when the world is facing unprecedented levels of uncertainty and stands on the brink of an even more severe global recession.

Without doubt, a thriving digital economy will be critical for the global economy to bounce back quickly and strongly from COVID-19. Therefore building online trust has become critical to our very future.

A billion reasons to protect customers

The global banking system processes more than a billion transactions every day, from transfers and domestic and international payments, to loan approvals and the creation of new accounts. And each one of these transactions represents an opportunity for some sort of financial crime, whether that’s money laundering, identity theft, bribery or the financing of terrorism.

The global pandemic has only served to accentuate this level of risk, with new threats emerging on the back of COVID-19, and bad actors looking to exploit new opportunities. In particular, online fraudsters are looking to target people who are using digital services for the first time as a result of the pandemic, often the most vulnerable groups in our society such as the elderly.

Research that we recently conducted in the UK and the U.S. found that concerns about online security are higher within financial services than in any other sector, with more than half of people (51%) reporting that they are ‘very concerned’ about identity theft when using financial services sites.

Crucially, 90% of people believe that banks have a responsibility to reduce cybercrime through whatever identity verification is necessary.

Building trust from day one

Of course, customers want online banking services to be responsive, intuitive and fast, but it’s important to recognise that, first and foremost, people want to know that their money and their personal data are safe.

Know Your Customer (KYC) and Anti-Money Laundering (AML) practices are now essential in enabling banks to not only identify each individual customer, but to build trust across the digital ecosystem more broadly.

Identity verification technology during the onboarding process enables a bank to demonstrate to its customers that it is taking their security seriously from the very outset of the relationship. First impressions count — more than three quarters (77%) of consumers claim that the account opening process can ‘make or break’ their relationship with a financial services brand.

Banks simply cannot afford anything other than optimal onboarding and identity verification – fail to deliver this and trust is immediately eroded and in many cases, the customer walks away.

On the other hand, where banks do succeed in demonstrating their commitment to security during these first engagements, delivering a fast, secure and seamless account creation process, they are able to develop a more meaningful relationship with their customers. As many as  84% of consumers report having greater trust in financial services brands that use real-time identity verification during the onboarding process and 71% are more likely to share more personal data.

A layered approach to identity verification

In order to provide first-class onboarding processes and establish trust at the outset of the customer journey, banks need to ensure they can deliver relevant and compliant identity checks for customers, dependent on their geography and the type of service or product that they are looking to access. They need to move beyond a ‘one size fits all approach’ to identity verification, which can lead to cumbersome or unnecessary checks on the one hand, and increased risk on the other.

This is why a digital identity network is so powerful. This is essentially a marketplace of hundreds of data sources, verification processes and tools that leverage network data intelligence to verify and authenticate identities online.

This marketplace approach lets businesses get a more holistic view of risk and then apply whichever verification layers are needed to provide assurance and build trust.

Zac Cohen

Zac Cohen

For example, a bank may only need to perform a basic KYC check when onboarding a customer with an established government ID number or driving license. If that same customer then wants to take out a loan, the bank would need to run other verification checks to create a higher level of assurance. And if the bank wants to onboard a customer whose only form of digital identity is a name tied to their mobile phone number, it would likewise build up assurance through multiple verification and authentication layers — for instance, ID document verification, which captures images from a person’s ID document and assesses its validity, combined with biometric authentication, which compares a selfie photo (taken and sent through the mobile phone) with the photo on an ID document.

With such a layered approach to identity verification, banks have complete flexibility and choice to apply the most appropriate identity checks at every stage of the customer journey, meaning that they can manage and optimise customer experience while minimising risk and ensuring compliance against a rapidly changing regulatory backdrop.

Building a global ecosystem of trust for the digital economy

To build and maintain online trust in such a complex and diverse environment is extremely challenging for banks.

Indeed, despite rapid digitisation across all sectors and regions, the internet continues to suffer from a lack of a critical identity layer that would solve many of these complex problems. While there are layers of protocols and methodologies for transporting data over networks, there is no protocol for transporting assurance. In online transactions, then, there is no standardized way to establish that an individual is who they say they are — the essence of identity.

Clearly this needs to change in order to drive trust, digital access and financial inclusion.

A digital identity network provides banks with the assurance they need in these turbulent times, protecting both themselves and their customers from fraud and delivering seamless customer experiences. In particular, it allows banks to enter new markets and reach new customers who have previously been marginalised or excluded from the digital economy, with confidence. In this way, digital identity can become a great equalizer, enabling more people to access and enjoy the benefits of a digital economy, built on trust.

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Workforce Diversity Matters To Our ESG Evaluation

Workforce Diversity Matters To Our ESG Evaluation 5

We believe the limited representation of Black voices in key decision-making processes prevents companies from reaping the benefits of a diverse workforce. It also exposes companies’ reputations to allegations of discrimination, as shown by recent calls on social media to boycott certain businesses after apparently racist behavior of employees were captured on video and shared. As such, we believe companies need to be deliberate in how they recruit, hire, and develop Black talent if they want to achieve a sustainable and diverse workforce, thereby improving ESG performance.

As part of our social assessment in the ESG Evaluation, we assess how effective a company is at developing a productive and inclusive workforce. Key indicators include employee retention and turnover rates, labor standards, pay, benefits, and rewards. We also assess whether fair labor standards are entrenched across the value chain. Moreover, we evaluate an entity’s preparedness to respond to long-term risks and opportunities, including from changing demographics and social patterns. We assess the extent to which decision-making demonstrates the company’s commitment to its long-term strategy and sustainability, as well as its success at building an inclusive workplace culture. These practices are particularly important given the presence of systemic racism, which continues to disadvantage Black people in corporate environments, particularly in the U.S.

U.S. workplaces have yet to achieve equal opportunity for people of different races, and policies have so far not fully addressed the widespread issue of racism. According to the Center of Public Integrity and the Washington Post, from 2010 to 2017, one million discrimination complaints were filed with the U.S. Equal Employment Office Commission. More than 30% of these cases related to racial discrimination.

Labour Market Outcomes Are Rooted In Systemic Racism

The Black community has long been subject to civil and human injustices that have contributed to a vicious cycle of low educational attainment, high unemployment, and concentrated poverty. This has made it difficult for Black people to enter the workforce, advance in higher wage work, and accumulate generational wealth. Poverty serves as a systemic hurdle to Black employees because it creates barriers to higher educational attainment, thereby limiting their ability to procure employment and financial opportunities that would enable wealth accumulation. In 2018, the Kaiser Family Foundation revealed that Black Americans have the second-highest poverty rate in the U.S. (after Native Americans, another highly marginalized group). The study also highlighted a striking wealth disparity; while the median net worth of a white household in 2016 was $103,000, for Black households it was only $9,200 (see chart 1).

Chart 1

Workforce Diversity Matters To Our ESG Evaluation 6

Yet, structural hurdles and enduring biases have also historically disadvantaged Black jobseekers, regardless of educational attainment. In the U.S., only 31% of Black employees are in management or professional positions, and a low proportion is in upper management positions (see chart 2).

Chart 2

Black Employees are largely underrepresented in management and professional occupations
Educational attainment of the labor force, age and above in the U.S.

Workforce Diversity Matters To Our ESG Evaluation 7

What’s more, Black employees are often held to higher standards than their white counterparts. A 2015 study by the National Bureau of Economic Research found that Black workers receive extra scrutiny in the workplace, leading to lower wages, slower promotions, and sometimes even job loss. This legacy may also create an additional barrier to career advancement, which is apparent in the low proportion of Black employees in upper management positions. Of the Fortune 500 companies, Black employees only account for 3.2% of executive and senior management and only 0.8% of CEOs (four in total) are Black (see chart 3).

Chart 3

Diversity And Inclusion Policies Are Only The First Step

Workforce Diversity Matters To Our ESG Evaluation 8

In our opinion, D&I programs are an important mechanism for improving racial equity in the workplace. They aim to link a company’s strategies, mission, and business practices in a way that supports demographic differences among talent and enables an environment in which all employees are empowered to contribute their unique views and perspectives. As D&I programs have evolved, they’ve begun to encompass initiatives such as targeted recruitment, diversity education and training, career development, mentoring, and grievance procedures. Done well, D&I programs offer several business benefits, from improved productivity to innovation, which help boost a company’s ESG performance by helping it anticipate changing consumer preferences and consumption patterns.

Several studies have investigated the link between diverse workforces and a firm’s financial performance. According to a 2020 McKinsey & Co study, companies in the top quartile for racial and ethnic diversity are 36% more likely to show financial returns that exceed the national industry median. Another study by sociologist Cedric Herring, during his time at the University of Illinois, Chicago, found that companies with the highest racial diversity were able to generate nearly 15x more sales revenue than firms with the lowest levels of racial diversity. Herring suggests that racial diversity is the most important predictor of a company’s competitive positioning, and a better indicator of sales revenue and customer attainment than a company’s size, years in business, and overall employee headcount. Diversity has also been linked to increased innovation potential. Studies show that diversity supports, enhanced creativity, more informed decision-making, increased capacity for innovation, improved customer acquisition, stronger revenue-generating potential, and better talent management.

Analyzing Diversity Remains A Challenge

Where available, we analyze a company’s ethnic diversity metrics as one indicator for a diverse workforce. Businesses tend to focus mainly on the workforce composition and on recruiting employees from different identity groups, including race, gender, age, culture, cognition, and education. Social equality activists are increasingly demanding that companies release diversity statistics, thereby holding them accountable for persisting race gaps.

Although transparency practices are improving, the availability of data is a persistent issue. According to the U.K.’s Business in the Community (BITC) Race at Work 2018 Scorecard report, only 11% of employers report ethnicity and pay data. In France, a race-neutral policy approach to education and employment stands in contrast to that in other European countries. It is illegal for employers or institutions in France to ask about someone’s race or ethnicity. The intent of this was to avoid discrimination. However, in 2006, more than 25 years after the 1978 law prohibiting the collection of ethnic data, a poll by research company TNS-Sofres showed that more than half of France’s black adults said they had experienced racial discrimination. Furthermore, companies more frequently report strictly on percentages of minority employees without commenting, directly or otherwise, on the positions they occupy. This can mask some disparities in terms of job level, promotions, or lack of diversity in certain roles.

We also take into consideration companies’ strategies to increase diversity including quotas, targets, or affirmative action policies. Over the past few years, several European countries have proposed or implemented diversity quotas for boards of companies, principally to increase female participation. The U.S. state of California followed suit in 2018, while legislation is pending in other states. Although still controversial, quotas have helped increase the number of women on boards. Similar policies on ethnic diversity are largely missing. In the U.K., the 2017 Parker Review set a voluntary target for FTSE100 boards to have at least one director from an ethnic minority group by 2021. The Review’s 2020 update shows some progress but not full compliance with the recommendations.

Regardless of the approach a company takes to increase workforce diversity, it is clear that quality data is a necessary ingredient of an effective diversity strategy. As such, we believe transparency at all levels of the organization is imperative for companies to solidify the trust and loyalty of their employees, suppliers, and shareholders. In turn, this will help boost productivity and strengthen the potential for innovation, thereby supporting ESG performance.

The Emphasis Must Be On Inclusion

Recruiting ethnic minorities does not necessarily translate into an environment that’s free of discrimination, allowing each employee an equal opportunity to advance. In our opinion, employers with a culture that tolerates discriminatory practices and microaggression are vulnerable to productivity lapses, decreased innovation, and lower creativity. Therefore, we believe the success of D&I initiatives appears to hinge on the inclusion side of the equation, which should ensure employees feel their contributions are appreciated and full participation is encouraged. According to author and inclusion strategist Verna Myers, Vice President of Inclusion Strategy at

Netflix, “Diversity is about being invited to the party. Inclusion is about being asked to dance.” Analyzing inclusion practices could provide better insight into how companies manage more covert forms of discrimination associated with microaggression. In a U.S. national survey of over 3,700 office workers conducted by the National Opinion Research Center (NORC), 58% of black respondents said they have encountered racism at the workplace. According to the NORC, workplace prejudice often shows up in subtle ways, through microaggression, typically during employee interactions through comments that proliferate Black stereotypes. Examples include referring to Black employees as intimidating, or unprofessional because of their hairstyles, thus creating a situation in which these employees are perceived as “not right” for the job. Such a toxic environment can go undetected by senior management, particularly when people of color are underrepresented at the workplace and in management positions. Many instances of discrimination also likely go unreported, making it even more difficult to expose covert forms of racism in corporate culture. In some cases, microaggression could ultimately result in higher staff turnover rates, one of the factors that informs a company’s Social Profile in our ESG Evaluation.

Many corporate leaders have committed additional resources to D&I programs in the wake of the Black Lives Matter protests. However, the success of these programs lies in how they resonate with employees. Literature on this topic suggests that achieving true inclusion requires a shift in the organizational culture to acknowledge the value of different backgrounds, expose conscious and unconscious biases, and create an atmosphere of respect and empathy. Managers, in particular, play a crucial role in employee development and are therefore important stakeholders in supporting racial inclusion. However, many are not necessarily inclined to reflect on or talk about racial discrimination, and without a business culture that fosters inclusion, meaningful change is unlikely to result.

Companies have started promoting conversations with Black employees to better understand their experiences, which we believe is a starting point. Ultimately, achieving a sustainable diverse workforce and addressing system racism will require continued leadership and accountability. A 2018 Boston Consulting Group study of more than 1,700 companies in eight countries, across different industries and sizes, found that five key factors help diversity to flourish:

  • Participative leadership: managers support employee contributions;
  • Strategic priority: top management and the CEO clearly demonstrate support for diversity; – Frequent communication: free and open communication is encouraged within teams;
  • Culture of openness to new ideas: employees feel that they can express their perspectives without fear of retaliation; and
  • Fair employment practices: employees with equal roles achieve equal pay, and companies enact robust anti-discrimination policies.

Looking To The Future

The Black Lives Matter movement has ignited a broader awareness of racism in society that has put the corporate sector in the spotlight. We believe companies’ diversity track records will be increasingly scrutinized, making a diverse and inclusive workforce a reputational imperative. In our view, more corporate entities will treat the challenge of workplace diversity as they would any other existential risk, and therefore gather the right information, including opting into voluntary diversity initiatives, to make the most informed choices.

A Call To Action: The Race At Work Charter

In collaboration with the U.K. government, the BITC established the 2018 Race at Work Charter detailing five actions all employers, regardless of sector, could undertake to further support diversity and inclusion. Since the Charter’s inception, more than 100 companies have added their signatures, including the National Grid, Goldman Sachs, and Deutsche Bank. By joining this initiative, companies are committing to taking meaningful action against discrimination in the workplace. The five actions are to:

  • Appoint an executive sponsor for race.
  • Report ethnicity data metrics and monitor progress.
  • Commit, at the Board level, to zero tolerance of harassment and bullying.
  • Clearly state that promoting equality in the workplace is the responsibility of all managers.
  • Take meaningful action to support the career progression of ethnic minorities.

The success of a company’s D&I efforts will be reflected in several indicators, including: the proportion of Black employees in the workforce overall, also in management and leadership positions; and the pay gap between employees in similar roles. Large, technologically advanced companies will likely be among the first to back their D&I commitments with meaningful targets and report regularly on progress. In the end, an effective, inclusive framework that supports long-lasting diversity and ESG goals depends on sound communication and ongoing commitment of employees at all levels of the organization.

Related Research

  • Environmental, Social, And Governance: Why Corporations’ Responses To George Floyd Protests Matter, July 23, 2020
  • The ESG Pulse: Social Factors Could Drive More Rating Actions As Health And Inequality Remain In Focus, July 16, 2020
  • Environmental, Social, And Governance Evaluation Analytical Approach, June 17, 2020
  • Environmental, Social, And Governance: How We Apply Our ESG Evaluation Analytical Approach: Part 2, June 17, 2020
  • How We Apply Our ESG Evaluation Analytical Approach: Part 2, June 17, 2020
  • People Power: COVID-19 Will Redefine Workforce Dynamics In The Post-Pandemic Era, June 4, 2020
  • The ESG Lens on COVID-19, Part 2: How Companies Deal with Disruption, April 28, 2020
  • COVID 19: A Test Of The Stakeholder Approach, April 21, 2020
  • The ESG Lens On COVID-19, Part 1, April 20, 2020
  • How To Navigate The ESG Risk Atlas, April 11, 2019
  • How We Apply Our ESG Evaluation Analytical Approach, April 10, 2019
  • The ESG Advantage: Exploring Links To Corporate Financial Performance, April 8, 2019

External Research

  • https://www.washingtonpost.com/graphics/2019/business/discrimination-complaint-outcomes/
  • https://www.mckinsey.com/featured-insights/diversity-and-inclusion/diversity-wins-how-inclusion-matters#
  • https://journals.sagepub.com/doi/abs/10.1177/000312240907400203
  • https://assets.ey.com/content/dam/ey-sites/ey-com/en_uk/news/2020/02/ey-parker-review-2017-report-final.pdf – https://assets.ey.com/content/dam/ey-sites/ey-com/en_uk/news/2020/02/ey-parker-review-2020-report-final.pdf
  • https://www.talentinnovation.org/_private/assets/BeingBlack-KeyFindings-CTI.pdf
  • https://www.bcg.com/publications/2018/how-diverse-leadership-teams-boost-innovation
  • https://www.bitc.org.uk/race-at-work-charter-signatories/
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What is loneliness and how can you manage it?

What is loneliness and how can you manage it? 9

By Iris Schaden Your Business and Personal Coach

A mere century ago, almost no one lived alone. Today, many do and it is not unusual. The recent lockdowns and isolation periods have amplified feelings of loneliness. But why do we feel lonely? Why do our bodies experience social pain? Learn about what we can do to improve our situation, prevent chronic loneliness and minimise the tremendous impact it has on our health.

Solitude and choosing to be alone can be bliss. Over the last sixty years the number of people living alone has increased in developed countries by more than 50 percent. In countries such as Denmark, Sweden and Switzerland, it is very common for people to live alone. But this does not translate into higher levels of selfreported loneliness. Many people have friends or family they can interact with on a regular basis.

However, it is important to recognise that this choice is different to loneliness, which can be a state of profound distress. Loneliness is a purely subjective and individual experience that can be felt by anyone, no matter their social, educational, gender or age demographic. Humankind are social creatures by nature – we struggle without it – and social connections are important to our health and emotional wellbeing.

Loneliness is a problem when we feel that no place is home; when we are in a group and we still feel social separation; when we spend time with our family but we feel like we don’t belong; or when we lose a relationship and struggle to adjust. It is a growing phenomenon in modern times, a by-product of our individualism, long-distance study and career opportunities or time-consuming work commitments.

The pandemic, with its required isolation and social distancing, has added additional stress to many households, but feelings of loneliness or adverse effects of social isolation are particularly prevalent in one-person households and young people aged 12–25. According to a study by VicHealth, even before COVID-19 young adults and adolescents reported high levels of loneliness, social isolation, social anxiety and depressive symptoms. Additionally, it is men who tend to report higher levels of loneliness than women.

Reported loneliness is on the rise. In 2017 and 2018 former US Surgeon General Vivek H. Murthy declared ‘an epidemic of loneliness,’ and the UK appointed a Minister of Loneliness. In these two countries, one in five adults reported that they often or always feel alone; in Australia, it was one in four adults. And this was before COVID-19, which makes us realise the mental and emotional impact lockdown has on individuals.

What happens to our bodies when we experience loneliness?

Neuroscientists, such as John Cacioppo, identify loneliness as ‘a state of hypervigilance whose origins lie among our primate ancestors and in our own hunter-gatherer past’. Our ancestors needed to belong to an intimate social group to survive. Cacioppo explains that our bodies respond to being alone, or being with strangers, as though we were in a dangerous situation.

Separation from other people (the group) triggers a fight-flight-or-freeze response and we feel social pain. While physical pain is primarily a sensory experience, social pain is the emotional state that comes from the distress of being lonely. Like the bodily sensation of hunger, it alerts us to a need, but instead of food the need is social interaction.

Loneliness generates anxiety: our breathing quickens, our heart races, our blood pressure rises and we struggle to sleep or sleep well. If we don’t pay attention, over time we start to act more fearful, defensive and self-involved. All of these actions drive others away and tend to stop those experiencing loneliness from doing what would benefit them the most: reaching out to others. It is a vicious cycle and one that is especially challenging for older and younger individuals.  

Tactics to help cope with feelings of loneliness. 

To belong is to feel at home in a place or situation where you feel included, comfortable and connected with others. In his assessment, Vivek H. Murthy wrote, ‘To be at home is to be known … You can feel at home with friends, or at work, or in a college dining hall, or at church, or in Yankee Stadium, or at your neighbourhood bar. Loneliness is the feeling that no place is home.’ Having relocated to different cities and countries and re-establishing my life over and over again, I can certainly say that loneliness can be a challenge.

Iris Schaden

Iris Schaden

How can we combat the feelings of loneliness and the anxiety that comes with it, before it becomes chronic and we find ourselves even more isolated over time? 

The first step in moving forward is acknowledging how you feel. Give those feelings a name with a specific timeframe; for example, today I feel alone or since I’ve been in lockdown, I have felt alone or since I lost my partner, I feel disconnected and lost. By doing this, we focus on the present and do not label our entire existence as lonely.

My personal strategy is to go outside if the loneliness gets too ‘heavy’; connect with other people through looks and smiles (even under a face mask our eyes can smile); call friends and family regularly; or schedule a brunch or glass of wine with friends (in person or video chat).

Practising random acts of kindness and gratitude, for others and ourselves, is another very effective and very positive way of bringing us back into the present moment and improving our overall wellbeing. Energy flows where our focus goes. It takes effort and sometimes it is indeed easier to just give in and watch a light-hearted movie on the couch. And that’s fine too!

If you are ever experiencing loneliness, I recommend exercising your social muscles and also seeking support. Remember that your feelings are normal as we are biologically fine-tuned to being with and interacting with others. However, you will need to make changes to avoid jeopardising your health. Once loneliness becomes chronic it becomes self-sustained and you will begin exhibiting defensive behaviour. As a defence mechanism, loneliness makes you assume the worst of others and you (your brain) become hypersensitive to social signals that might be interpreted as hostile towards you, when in reality people might just be trying to help you.

Large studies have shown that feeling lonely has a tremendous impact on your health: it can make you age quicker, cause dementia to advance faster, weaken your immune system and lead to anxiety and depression. Many people turn to substance abuse which only serves to numb the symptoms, rather than treat the source. And while you can find so much information online, knowing is not enough. Remember that reaching out for help is not a sign of weakness but one of strength. So please reach out to your network, talk to your health professional or get in contact with me.

There are different ways to improve your overall wellbeing. Let’s discuss.

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