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DEI Measurement, ESG Investment, ESG Data, esg disclosure rules

DEI Measurement of ESG is Beginning to Emerge

There has been plenty of public discussion, especially in the past year, about the demands of environmental, social and corporate governance (ESG) principles on companies. This has covered everything from how ESG principles could be enforced to how to ensure accurate data or a data standard for evaluating how well ESG principles are followed. Within these discussions, the environmental piece of the equation has gotten the most attention, but what about the “social” element? DEI (diversity, equity and inclusion) has emerged as a way to define this, and generally applies in the context of the workplace. With this, however, comes the challenge of DEI measurement.

Differing standards for DEI Measurement

Just as the EU has SFDR defining its ESG standards and the US just has guidance from the SEC regulatory agency, there are differences between how the EU and the US handle DEI standards. US companies and their initiatives seem to be setting the tone on DEI for the rest of the world, according to a Harvard Business Review article.

Yet the US does not quite have the highest rating for its DEI efforts, according to an index compiled by Denominator, a DEI scoring and database company. The US ranks 29th globally in Denominator’s index, while several European countries are in the top 20 – and five of those, plus the UK, are in the top 10. Denominator determined these rankings using 55 indicators. Diversity includes socioeconomic traits, race and ethnicity, sexuality, disability, age and gender. Equity includes equality, health, education and non-discrimination. Inclusion incorporates enablement, freedom of expression, freedom of religion, minority rights and tolerance.

The problem with these criteria, as the HBR article notes, is that cultural and historical differences between countries can lead to skewed perceptions and reporting of these kinds of indicators. As an example of cultural differences impacting DEI scores, HBR notes that Nordic countries have a culture that emphasizes the idea that no single person, is special. This can be a barrier against acknowledging any kind of inequality that might be found in an outside assessment, but not a self-reported one.

Quantifying DEI

Measuring qualitative characteristics in a quantitative manner raises many questions. DEI reporting usually relies on companies’ human resources departments. Indicators based on sentiment and perception can fluctuate. The PwC consultancy identifies four reasons why quantifying DEI (also referred to as D&I) is difficult:

  • Uncertainty – HR departments may track D&I programs in a way that is difficult to communicate, if they even do track these programs. Some companies simply may not want to track the information.
  • Unflattering company image – Transparency (about D&I) drives accountability. Companies may not like the story that metrics would tell.
  • Outdated understanding – Even if companies have programs to improve D&I, they may not be updating them to account for the latest DEI concerns.
  • Struggle to inspire and measure progress – Tough questions and thoughtful reflection can do more to show progress on D&I, rather than trying to measure it quantitatively.

Still, measurement solutions may emerge. In the UK, for instance, The Diversity Project, an organization of asset managers, has published “The Asset Owner Diversity Charter,” which includes a D&I questionnaire that firms can use. More generally, the Academy to Innovate HR (AIHR) has devised eNPS, employee net promoter score, based on a two-question survey, as one of 10 metrics that can be tracked to measure D&I. These include:

  • Demographics across organization levels
  • Retention across employee groups
  • Employee turnover
  • Adverse impact of discriminatory practices, which compares selection rates for different groups
  • Candidate demographics
  • Employee advancement and promotion rates
  • Equal pay and equal equity
  • Employee resource group participation
  • Initiative-focused DEI metrics, which depend on employer initiatives concerning participation in events and training, as well as several of the preceding measures

Clearly, as public disclosure of DEI measurement is a newer subset of ESG measurement, which itself is a relatively new field for compliance efforts and corporate consciences, there’s a long way to go. That begins with defining and agreeing on what characteristics and factors should be included, before an entity can settle on how to measure these matters. While scoring and measures are springing up, reporting will have cultural issues and barriers. Also, standardizing these measures for more accurate comparison is going to be another big challenge.

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