In this article, Heidi Ridley and Kathryn McDonald — co-founders of Radiant ESG, an ESG-focused consulting firm — explain why it is so important that corporations disclose ethnicity data.
In September 2020, Citi GPS published a report estimating that the racial inequality gap between black and white people along four key dimensions — wages, education, housing and investment — has cost the US economy $16trn over the past 20 years.
It also showed that not closing the gap meant an additional $5trn of US GDP could be forfeited over the next five years. Twelve months earlier, a report by McKinsey explored the impact of the racial wealth gap, estimating a dampening effect on consumption and investment that will cost the US economy between 4–6% of GDP between 2019 and 2028. Putting aside the obvious moral call to action, the economic cost of racial inequality is something that our economy cannot afford.
The demand that companies be part of the solution has hit a crescendo, but data, which forms the lifeblood of corporate America, is conspicuously absent when it comes to race and ethnicity.
Barriers to data capture
In some parts of the world, there are cultural prohibitions on the collection of sensitive information about race and religion, with good reason. For example, Germany and France have some of the most stringent prohibitions, having enacted laws protecting citizens from the kind of list-keeping that was a hallmark of the Nazi and Vichy regimes. In the UK, initiatives like the Business in the Community Race at Work Charter have attracted a significant number of signatories from both the public and private sector, though it has not yet led to large amounts of published race data (even though data capture is a stated goal).
In the US, all but the smallest companies (those with under 100 employees) are required to file what is known as an Employment Information Report (EEO-1) to the US Equal Employment Opportunity Commission detailing the diversity profile of their workforce (including race).
However, there is no requirement that these reports be made public. To date, publicly available data on race and ethnicity for corporations has been hard to come by. In 2019, just under half of the Fortune 100 companies released some information about the ethnic make-up of their corporate boards, but company-wide race and ethnicity statistics have been hit and miss, often taking the form of non-standard reporting of only the most palatable facts (if any).
"Company-wide race and ethnicity statistics have been hit and miss"
Challenging narrow thinking
Two forces could now challenge the paucity of race data: firstly, the widespread recognition that diversity is a source of strength for companies, and secondly, the social upheaval caused by both COVID-19 and the reaction to police brutality against people of colour.
Investors have largely embraced the logic for increased diversity within the companies they invest in. While an initial focus has been on gender — with a preponderance of gender-focused studies showing the relationship between diversity and financial performance — attention has now turned to other dimensions of diversity like race and ethnicity. The theory behind why diversity “works” is clear: diversity, when supported by a culture of inclusion, acts as a remedy for groupthink (the practice of thinking uncritically as a group, often resulting in poor decisions).
For purely economic reasons, a mix of employees who are from different backgrounds or different problem-solving frameworks, and who better represent the mix of customers or society at large, is now thought of as “best practice” and seen as a competitive advantage for corporations.
Answering the call for greater racial diversity
The disproportionate suffering of black and brown people in relation to the coronavirus pandemic (with respect to both health and financial outcomes), and the calls for justice by Black Lives Matter and other groups in the wake of George Floyd’s killing in the US, have led to a groundswell of demand that corporations take action.
Last year saw a series of high-profile promises on the part of companies for greater racial diversity and opportunity within their ranks. While a few have demonstrated that commitment with tangible action, most have not, and patience on the part of communities and customers has worn thin.
"While a few [companies] have demonstrated that commitment [to diversity] with tangible action, most have not, and patience on the part of communities and customers has worn thin
Investors also see the need to hold corporations accountable for recent statements and commitments made on the subject of greater racial inclusion, but this is impossible to do without data.
In some cases, asset owners are taking action, such as the New York State Common Retirement Fund, the third-largest public pension fund in the US, which is pushing companies to reveal racial data and boost their diversity, pledging to vote against board members ignoring its requests.
Institutional Shareholder Services, a widely used provider of outsourced proxy research, has announced that race disclosure will be a focus, starting this year. Some of the largest asset-management firms, like BlackRock and State Street Global Advisors, have joined responsible investing firms like Calvert in making disclosure of race data a top priority.
The US Securities and Exchange Commission, for its part, has mandated that companies begin addressing “human capital resources” in their filings. After many years of talk, there now seems to be real investor action when it comes to eliciting improved company racial and ethnic data disclosure.
"After many years of talk, there now seems to be real investor action when it comes to eliciting improved company racial and ethnic data disclosure"
In response to these forces, some green shoots are starting to emerge.
A recent report by Just Capital reveals that, among the 1,000 largest US firms, there has been an 84% increase in companies revealing EEO-1-level diversity details since December 2019. This is relative to a low base, but it does represent significant momentum. Meanwhile, last year Scott Stringer, New York City Comptroller, called on 67 large public firms to publish their EEO-1 data and 54 have now done so or committed to, reported the Wall Street Journal.
The path to racial diversity
Collection of corporate race and ethnicity data in parts of Europe and Asia will continue to be a challenge. Legal prohibitions, as well as cultural obstacles, mean that progress may be slow in certain parts of the world. Ethnic minorities in Europe and Asia face a seemingly intractable problem: to prove discrimination, they must agree to data collection.
So, what is the solution? How do we make real progress on race and ethnicity data disclosure?
In countries where the collection of this kind of data is taboo, we must let those who perceive they are most at risk lead the charge. In the meantime, the investment community’s focus should be on achieving full EEO-1 disclosure for the 1,000 largest US firms.
Compared to other types of diversity reporting, the EEO-1 filing is seen as superior. It is sufficiently nuanced with respect to its racial categories and has the benefit of being standardised. This means that, along the EEO-1 dimensions of race and gender, there is natural comparability — a necessity for meaningful research.
And, by virtue of EEO-1 reporting being a requirement for most companies, no additional cost or effort is needed. This focus would result in a standardised racial data set spanning all economic sectors. Momentum is already favouring this approach; for investors, this means pushing against an open door.
"No additional cost or effort is needed"
There is no immediate remedy to the lack of race and ethnicity data that is needed to do proper research and to hold companies accountable for promises made, but there are select opportunities to make progress.
Approached intelligently, these pockets of progress could make a real difference when it comes to building a well-constructed corporate data set. And while disclosure on the part of companies is not a substitute for action, it will allow for a baseline understanding of where the corporate world stands today with respect to racial diversity — an important first step in achieving both economic and societal goals.
This article was written for Opto by Kathryn McDonald, co-founder of Radiant ESG. To read more insights from Radiant ESG, visit their site here.