How Diversity, Equity & Inclusion Informs ESG Analysis
August 18 marks the 100th anniversary of the beginning of women’s suffrage in the U.S. When Tennessee ratified the 19th Amendment of the Constitution in 1920, women nationwide gained the right to vote. However, not every woman felt the effects of its passage immediately; women of color faced additional hurdles when trying to exercise their constitutional right.
100 years later, gender equality issues across all aspects of society remain an important global focus. In this article, ESG Analyst Hannah Herold discusses the importance of gender equality initiatives in corporate workplaces and boardrooms.
Diversity, Equity and Inclusion May Affect the Bottom Line
From an investment perspective, research increasingly shows the financial benefits to companies that emphasize diversity, equity and inclusion (DE&I) in their organizations and business strategies. For example, the Pipeline’s “Women Count 2020” report found FTSE 350 companies with executive committees comprised of at least 33% women had a net profit margin over 10 times greater than companies with no women on their committees.
Investors place growing importance on this topic and are the main drivers of momentum in the U.S. DE&I is also playing a larger role in manager selection as asset owners and large investment consultants include more questions and criteria during the due diligence process. A survey by the CFA Institute found that 83% of institutional investors value gender diversity specifically, with 55% believing that it drives better performance in investment teams. Even so, governments are passing new regulations to establish quotas for female participation and revamping older regulations with stricter requirements. Examples include Germany, France and California (the first and only U.S. legislation).
How We Factor DE&I into Our Investment Analysis
We believe companies lacking transparency in this area or trailing their peers’ DE&I efforts may see negative impacts to their long-term competitiveness, brand reputation or financial condition. Therefore, when evaluating companies for our portfolios, the ESG and Investment Stewardship Team uses a proprietary framework to assess each company’s risks related to environmental, social and governance (ESG) issues. Within this framework, we consider DE&I to be sector agnostic and include it under both the Social and Governance pillars of the ESG equation.
Under the Social pillar, we benchmark a company against its peers based on key performance indicators (KPIs). One of those indicators includes human capital management—a firm’s ability to hire, develop and keep employees. To evaluate this KPI, we consider firm policies, attrition rates and diversity and inclusion practices. We may also evaluate a company’s involvement in recent controversies, or its exposure to certain regulatory developments.
Gender diversity in the boardroom and in senior and middle management is one of the factors we consider when analyzing a company’s Governance practices. The Pipeline's “Women Count 2020” report provides information about the net profit margins of companies with gender-balanced leadership compared to those that lack it. We immediately flag companies with no women on their boards of directors. We also use the Hampton-Alexander Review’s annual “FTSE Women Leaders” report to help evaluate corporate board membership.
Advancing DE&I and Making Positive Social Impacts
In addition to identifying potential risks associated with companies’ lack of meaningful DE&I, our ESG framework also helps identify investment opportunities to help advance DE&I. For example, current long-term growth trends and improving corporate practices in emerging markets (EM) are providing various investment opportunities. Several EM companies are making positive social impacts by contributing to the U.N. Sustainable Development Goals, including Goal 5 (Gender Equality).
Our Commitment to DE&I
At American Century Investments, we believe our workforce should represent a diversity of backgrounds, experiences and thought. A diverse and inclusive culture helps us better understand our clients, deliver superior performance and build long-term relationships.
Our DE&I activities include:
Serving as a founding member of NICSA’s Diversity Project, an initiative focused on increasing diversity within the asset management industry.
Signing the CEO Action for Diversity & Inclusion pledge.
Partnering with Girls Who Invest, a nonprofit dedicated to increasing the number of women in portfolio management and executive leadership in the asset management industry.
Internally, we provide employees programs that offer female-centric resources for career advancement, firmwide exposure and holistic advice. Accelerate—the firm’s business resource group (BRG) for women—provides opportunities for involvement in DE&I policy initiatives and the RISE (Reach, Inspire, Support, Empower) mentorship program. These programs, along with other BRGs, seek to foster a diverse, inclusive workplace aligned with our mission, values, goals, business practices and objectives.
When portfolio managers incorporate Environmental, Social and Governance (ESG) factors into an investment strategy, they consider those issues in conjunction with traditional financial analysis. When selecting investments, portfolio managers incorporate ESG factors into the portfolio's existing asset class, time horizon, and objectives. Therefore, ESG factors may limit the investment opportunities available, and the portfolio may perform differently than those that do not incorporate ESG factors. Portfolio managers have ultimate discretion in how ESG issues may impact a portfolio's holdings, and depending on their analysis, investment decisions may not be affected by ESG factors.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.