The push for justice

By Emily DeMasi and Diana Glassman, directors – engagement, EOS at Federated Hermes

The death of George Floyd and the ongoing pandemic have highlighted social inequities that were previously ignored. Board and workforce composition and the inequitable impacts of business practices on diverse communities reflect and perpetuate underlying racial and ethnic injustices that create systemic risk. But addressing social injustice can help to create long-term value.

Social injustice occurs when people do not have access to the same rights and opportunities afforded to others, due to race, ethnicity, gender, sexuality, religion, disabilities or other characteristics. Examples include inequitable access to employment, education, housing, health services and finance; negative stereotypes; and poor and marginalised communities’ greater exposure to pollution and climate change.

These inequities contribute to widening income inequality and persistent, multi-generational gaps in family wealth, educational attainment and health indicators.

Social injustice polarises society, frays democracy and hinders economic growth, as well as raising profound ethical questions. These forces create systemic risk that may impact the performance of the economy, the market as a whole and all asset classes. Inequalities created by social injustice pose a threat to long-term universal owner returns, similar to other long-term ESG issues such as climate change.

Addressing the financial risks of social injustice is therefore in investors’ financial self-interest – in addition to being the right thing to do. But the risks are poorly understood. While initiatives to create greater visibility, such as the Task Force on Inequality-related Financial Disclosures and the World Economic Forum’s inclusive growth benchmarks are underway, they are still emerging.

Taking a systemic stewardship approach to diversity, equity and inclusion (DEI) pushes boards and companies to create value by making three positive changes:

• To build more inclusive boards, workforces and cultures that help dismantle obstacles and enable all individuals to maximise contributions to their companies.
• To reduce harmful company practices that perpetuate injustice in society.
• To develop proactive strategies and products that reduce inequities.

From the head down

All companies should look at how they can address inequities within their boards and workforces. DEI is an ethical and business imperative. Expanding and improving on DEI, both at the leadership level and throughout the wider organisation, creates enduring value by improving decision-making, attracting talent, enhancing workforce satisfaction, and stimulating insight and innovation.

A growing body of evidence supports the system-wide benefits of social and economic inclusion, and the risks of continued exclusion, by linking more diverse company leadership with greater financial performance.

Many companies continue to fall short in terms of reflecting the diversity of society on their boards, in senior management and throughout the workforce. Groups should strongly advocate for boards of diverse composition, in the broadest sense, and for the execution of meaningful workforce-level DEI strategies. Our expectations include meaningful CEO and board commitments and effective board oversight of a clear strategy accompanied by targets and disclosure of performance.

Investors should expect companies to have moved beyond public statements to actively building inclusive cultures. This should include the recruitment and career progression of members of underrepresented groups, including at the board and senior levels; training all employees in dignity and respect, plus unconscious bias and allyship; and increasing employee engagement, retention and development.

Rooting out injustice

Fixing a company internally is a prerequisite for its ability to recognise and prevent harm to customers and stakeholders. Doing so requires understanding and addressing deeply rooted and complex problems that inevitably impact both a company’s workforce and the society within which it operates.

Companies must gain a clearer picture of the potentially inequitable impacts of activities on external stakeholders, with effective oversight and performance evaluation.

Proactive strategy

It is important to strengthen the health of the stakeholder ecosystem to reduce systemic risk. Poor and marginalised populations have many unmet needs, creating opportunities for companies. We encourage companies to apply a DEI lens to innovate and create new products and services, including those that help to achieve the UN Sustainable Development Goals. These may open up new businesses, attract loyal customers, employees and business partners, and build brand value.

Active investors can drive meaningful positive change that addresses injustice and creates financial value. More attention must be paid to the systemic risks of injustice and, conversely, the benefits of a more inclusive society. Boards must be held to account for the social impacts of practices that create risks for their own companies and the wider financial system, and should take ownership of company purposes that enhance the health of the stakeholder ecosystems that impact their own and investor returns.