The "S" in ESG

Climate change is frequently front and center in the conversation about environmental, social, and governance (ESG) concerns. However, social issues are becoming increasingly prominent.

Diversity, Equity, and Inclusion Play a Bigger Role in Investor Decision-Making

Asset manager BlackRock is trying to make it crystal clear that companies in which it invests need to start taking responsibility for adequately addressing social issues from the ground up. In BlackRock’s 2021 proxy voting guidelines and recent stewardship publications, the company emphasized that it is now asking US companies to disclose the racial, ethnic, and gender makeup of their employees. BlackRock did not stop there—it is also requiring companies to report the measures that they are taking to improve diversity, equity, and inclusion. In BlackRock CEO Larry Fink’s 2021 letter to CEOs, Fink focused primarily on climate risk, as he did in 2020, but he additionally asked that companies’ sustainability reports contain disclosures that reflect their long-term plans to improve diversity, equity, and inclusion. BlackRock is not alone in this shift in focus. For example, State Street has taken similar actions.

US Senate Considers Diversity Data Legislation 

Investors’ focus on reporting on issues around diversity, equity, and inclusion could become government-mandated reporting. While it is no surprise that there is an increasing focus on the environment and climate change under the current administration, social issues are also at the forefront of the agenda. Last week, the Senate Committee on Financial Services considered multiple proposals for legislation on diversity data in a hearing titled “By the Numbers: How Diversity Data Can Measure Commitment to Diversity, Equity, and Inclusion.” Pieces of legislation considered include legislation that would do the following:

• Require public companies to annually disclose the gender, race, ethnicity, and veteran status of boards, nominees, and senior executives
  
• Require Securities Exchange Commission-registered companies to consider at least one diverse asset manager and report the extent to which they contract diverse asset managers
  
• Mandate Dodd-Frank Section 342 reporting requirements for regulated entities
  
• Require banking regulators to include a diversity and inclusion component in the Uniform Financial Institutions Rating System and banks to report diversity and inclusion assessments
  

In considering these changes, the senate recognized the significant benefits diversity and inclusion provides for businesses and shareholders. It may be an indication that the "S" will follow in the path of the "E" in ESG, garnering more attention in the future from investors and governments alike.