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Diversity comes of age as an investment theme

Guirec Thouement, June 2022

Diversity comes of age as an investment theme 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 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. 3. World Economic Forum, Global Gender Gap Report, March 2021 4. International Labor Organization, The gender gap in employment: What’s holding women back? February 2022 en-GB/Stories/Employment/barriers-women#intro 5. An example is McKinsey, Delivering through diversity, January 2018, people-and-organizational-performance/our-insights/delivering-through-diversity 6. Allianz Global Investors 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. 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 equal-pay/eu-action-equal-pay_en#pay-transparency 10. International Capital Market Association, Voluntary Process Guidelines for Issuing Social Bonds, June 2021 documents/Sustainable-finance/2021-updates/Social-Bond-Principles-June-2021-140621.pdf 11. Fannie Mae, Social Bond Framework, April 2022 12. GIIN, Gender Lens Investing Overview, 2019 3

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