Diversity comes of age as an investment theme

Diversity comes of age as an investment theme allianzgi.com June 2022 The pandemic illustrated the fragility of diversity and inclusion, making it a critical sustainable investment topic. Investors and regulators alike are insisting that companies employ more diverse workforces from the top down. At the same time, investments are emerging that specifically target greater diversity – both within organisations and in wider society. Guirec Thouement The notion of fairness in the capitalist Sustainability economy is gaining ground – including equal Key takeaways: Analyst treatment of individuals, communities and – The Covid pandemic exposed the 1 individual diversity categories. Arguments modern economy’s inequalities, in favour of encouraging diversity are sharpening the focus on social issues nothing new, but the pandemic revealed – Diversity was negatively impacted by the fragility of the prior decades’ apparent the pandemic, but is key to a resilient progress. In this report, we briefly introduce economic recovery and growth diversity’s complex layers and identify – We expect diversity to be increasingly the lessons learned during the pandemic regarding gender diversity – the most measured and integrated into advanced diversity typology. Furthermore, investment decisions, which will be we discuss how investors can integrate reinforced by evolving regulation diversity into investment decisions and – Expanding diversity data will be active asset management. integrated into screening, engagement, Understanding the breadth of diversity voting and investment solutions While articles and reports refer extensively to diversity, equity and inclusion (DEI), it of how the issue of “difference” affects their is often narrowly applied as a concept. behaviour towards, or perceptions of people There is a breadth and depth to diversity, and communities. both in terms of the range of different communities affected and the various To explain DEI’s breadth, the term diversity is issues that impact them. Without education commonly linked to gender, gender identity, and understanding, many people in the ethnicity, age, religion or sexual orientation. broader population may not be aware It also encompasses education, language, 1. Allianz Global Investors, Unlocking the “S” in Capitalism, February 2022 https://www.allianzgi.com/en/insights/ outlook-and-commentary/unlocking-the-s-in-capitalism.

Diversity comes of age as an investment theme disability (mental or physical) and geography. Failure to The social case for greater inclusion is clear and there support DEI takes many forms and is often unintentional, is significant academic evidence aligning it to stronger 5 although it’s important to recognise that legal provisions financial performance . Consequently, many investors now exist, but sometimes prove a hindrance. Formal recognition regard limited gender diversity in investee companies as of diversity types, and understanding of the causes of non- a risk and have raised their expectations on the extent to inclusion, can foster development of appropriate processes which diversity is integrated into investment decisions. and strategies that embed greater inclusion. Corporate diversity data nearing critical mass Lessons from the last two years Data providers and investors are increasingly screening Looking at how the Covid pandemic affected diversity companies for diversity information, requiring greater progress brings the lack of gender diversity back into disclosure. Regulators are likely to reinforce the the spotlight as this period had a particularly adverse requirement for greater disclosure (see later section). We impact on women. A study from The Lancet covering the expect required data to be aggregated at company and first 18 months of the pandemic up to September 2021 board levels at the very least, with periodic and consistent showed that 26% of women experienced “employment reporting. Companies failing to provide appropriate loss” versus just over one in five men.2 Similar findings disclosures, strategic focus or meet certain thresholds of increased job losses for women came from a World may find themselves “screened” out or “voted against”. Bank3 report. The added burden on women of caring for However, diversity is a complex topic and there are data- others resulted in the pandemic experience widening a access hurdles facing investors in certain geographies. persistent employment gap. According to the International Engaging with companies on diversity issues is often Labour Organisation (ILO)4, the current global labour force participation rate for women is just under 47%, while necessary to overcome these obstacles and better for men it’s 72%. This difference of 25 percentage points understand an organisation’s diversity profile, strategic extends in some regions of Africa, the Middle East and focus and governance of the topic. The information South Asia above 50 percentage points. investors seek typically includes formal strategy statements, clear processes, board member responsibility, Beyond the employment gap is the salary gap. The a link to compensation and, where required, pathways to unadjusted pay gap averages 20% globally, according strengthen a company’s position. to the ILO. Yet this understates how much less women are paid because it does not take into account a range Driving positive change through active stewardship of relevant factors such as type of occupation, education Engagement takes place either bilaterally or in and experience that might give a truly accurate picture of collaboration with other investors. Allianz Global the wage differential. Data for this “adjusted” pay gap is Investors (AllianzGI) actively uses its proxy voting rights very limited. and usually votes against re-election of the chair of the The key question arising from the experience of women nominations committee of large-capitalisation companies in the pandemic is: if progress on gender diversity was in developed markets if women make up less than 30% of the board.6 We also expect nationality and ethnic diversity challenged, how much more difficult was it for other under-represented groups to advance? Answering this to appropriately reflect a business’s geographic footprint question fully requires broader and more granular data. and employee and customer profile. For example, But the issue leads to a more general point: it’s logical to AllianzGI would not support re-election of the chair of a assume that equality of access and opportunity for all large-cap listed US company’s nominations committee groups could narrow the labour force’s current gaps in if there was not at least one board member from an skills and employment. under-represented ethnic group. This rule will also be implemented in the UK next year. The evolution of diversity as an investment theme Collaborative engagement is also a powerful tool. In Investors now take a holistic view of sustainability 2021, AllianzGI joined the 30% Club Investor Group in concerns, expecting that issues such as diversity are France, which aims to increase female representation at embedded into the values of asset management firms. leadership levels of large listed domestic companies. Increasingly, asset managers are using publications like sustainability or stewardship reports to disclose their own The role of regulation diversity data as well as how they have engaged with Regulation on diversity is evolving. A growing number investee companies and cast proxy votes on this issue. of states in the US and the EU now insist on a minimum 2. L S Flor, J Friedman, C N Spencer, J Cagney, A Arrieta, M E Herbert et al, Quantifying the effects of the COVID-19 pandemic on gender equality on health, social, and economic indicators: a comprehensive review of data from March, 2020 to September 2021, The Lancet, March 2022 https://www. thelancet.com/journals/lancet/article/PIIS0140-6736(22)00008-3/fulltext 3. World Economic Forum, Global Gender Gap Report, March 2021 https://www3.weforum.org/docs/WEF_GGGR_2021.pdf 4. International Labor Organization, The gender gap in employment: What’s holding women back? February 2022 https://www.ilo.org/infostories/ en-GB/Stories/Employment/barriers-women#intro 5. An example is McKinsey, Delivering through diversity, January 2018, https://www.mckinsey.com/business-functions/ people-and-organizational-performance/our-insights/delivering-through-diversity 6. Allianz Global Investors https://www.allianzgi.com/en/our-firm/esg/our-approach 2 2

Diversity comes of age as an investment theme Exhibit 1: gender diversity KPIs for MSCI ACWI index constituents (database of 2,753 companies) % of companies disclosing the share of 85% women at the board of director level % of companies disclosing the share of 78% women at the executive management level % of women at the workforce level 63% % of companies disclosing the share of 29% women at the senior management level % of companies which disclose all these data 15% Source: MSCI, as at 10 March 2022 percentage of women at board level, and there is rising including diversity, aligning with Nasdaq rule changes 8 pressure to improve disclosure (see Exhibit 1). For example, related to board diversity and disclosure. The European 7 9 the Securities and Exchange Commission is planning to Commission recently proposed a new directive updating publish amendments to disclosure regulation this year to the current text on equal pay, with new dispositions to improve transparency into the composition of the workforce, improve pay transparency, including adjusted pay gaps. Growing opportunities to invest for greater diversity Many of the available instruments and sustainable Away from screening for weak diversity “footprints”, investment offerings use the United Nations’ 17 there are increasing opportunities to invest in companies Sustainable Development Goals (SDGs) as a with a broad and positive diversity “handprint” – those framework. SDGs 5 and 10 specifically address gender companies that have a positive impact in society beyond diversity and reduced inequalities, but SDG 3 (Good their own footprint. For this reason, diversity lends itself health and Well-being), SDG 6 (Clean Water and to impact investing where a positive measurable benefit Sanitation) and SDG 8 (Decent Work and Economic is targeted. Growth) can have meaningful ancillary benefits for inclusion, especially in resource-constrained, Emerging opportunities include social, sustainability lower-income economies. In 2019, the Global Impact and sustainability-linked bonds. These debt instruments Investing Network published its Gender Lens Investing can direct capital either to specific diversity projects 12 Overview , which provided a framework for investors or provide capital for a company that is committed to which could similarly be adapted to improve other stated diversity goals. For instance, the Social Bond workplace diversity weaknesses. Principles specifically aim to address social issues 10 To conclude, the pandemic not only illustrated the related to diversity. For example, an emerging-markets telecoms operator has issued a sustainability bond fragility of diversity but also brought it to centre stage to fund information and communication technology for the investment community. The momentum for training for women, boosting their participation in the investors to act as change agents for greater diversity digital economy. In the US, Fannie Mae’s Sustainable in workforces, as well as wider society, is significant and Bond Framework makes home ownership and rental still growing. In many ways, the present time will prove possible for millions of Americans, specifically including to be a coming of age for DEI. 11 underserved communities. 7. US Securities and Exchange Commission, Prepared speech before the PRI “Climate and Global Financial Markets” Webinar, July 2021 https://www. sec.gov/news/speech/gensler-pri-2021-07-28 8. US Securities and Exchange Commission, Statement on Nasdaq’s Diversity Proposals – A Positive Step for Investors, August 2021 https://www.sec. gov/news/public-statement/statement-nasdaq-diversity-080621 9. EU Action for Equal Pay, Equal pay for equal work, March 2020 https://ec.europa.eu/info/policies/justice-and-fundamental-rights/gender-equality/ equal-pay/eu-action-equal-pay_en#pay-transparency 10. International Capital Market Association, Voluntary Process Guidelines for Issuing Social Bonds, June 2021 https://www.icmagroup.org/assets/ documents/Sustainable-finance/2021-updates/Social-Bond-Principles-June-2021-140621.pdf 11. Fannie Mae, Social Bond Framework, April 2022 https://capitalmarkets.fanniemae.com/media/20616/display 12. GIIN, Gender Lens Investing Overview, 2019 https://thegiin.org/gender-lens-investing-initiative 3

Diversity comes of age as an investment theme Allianz Global Investors is a leading active asset manager with over 700 investment professionals in 24 offices worldwide and managing EUR 637 billion in assets. We invest for the long term and seek to generate value for clients every step of the way. We do this by being active – in how we partner with clients and anticipate their changing needs, and build solutions based on capabilities across public and private markets. Our focus on protecting and enhancing our clients’ assets leads naturally to a commitment to sustainability to drive positive change. Our goal is to elevate the investment experience for clients, whatever their location or objectives. Active is: Allianz Global Investors Data as at 31 March 2022 Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication’s sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws. This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK). © 2022 Allianz Global Investors 2200925 | 6167