- We know that diverse teams have potential to outperform and that these benefits accelerate as diversity develops into equity, inclusion, and belonging.
- For many U.S. companies, diversity information disclosure is currently limited in both breadth and depth.
- As fundamental researchers and active managers, we contribute to progress by seeking greater transparency from and personally engaging with company management.
"Maybe you are searching among the branches, for what only appears in the roots." — Rumi
The "S" of ESG — social performance — has always been the hardest to measure, yet we believe it is the human element of business that makes everything else possible. When we talk with CEOs, regardless of the type of business they run, their top priorities and concerns are consistently people-related: employees, customers, and communities.
This has been even more amplified in recent months. First, attention to caring for employee safety and well-being intensified as the COVID-19 crisis accelerated. More recently, companies have become increasingly engaged in deeper considerations of diversity, inclusion, and racial justice in the wake of the killings of George Floyd, Breonna Taylor, Ahmaud Arbery, and many others.
Why are the standard metrics for "S" so unsatisfying?
Sustainable investing aims to take a more holistic view of corporate performance, with the premise that over the long term there is no such thing as an externality (a consequence not counted as a cost). We believe that management teams that are effective leaders on relevant sustainability issues or that are solving key sustainability challenges are more likely to create thriving businesses.
At the same time that we recognize the complexity and nuance of this more expansive approach, we are investors who crave data and quantitative analysis and comparability. This is why we often use focused metrics like the percentage of women on a corporate board, which are relatively easy to monitor and analyze.
These narrowly defined metrics are important, but they are not complete.
How do we link individual metrics to deeper issues?
Whenever we analyze individual data elements for environmental, social, or governance issues, we aim to put the information in perspective. When it comes to diversity, data is currently limited in both breadth and depth. For example, gender diversity on corporate boards is frequently monitored by sustainable investors as a specific indicator of a single type of diversity in one part of an organization. This data, though defined in a limited, binary way, is useful, and it is more widely reported than other measures. Analyzing this information helps us to see trends over time and differences across companies, sectors, and regions, for this one specific dimension.
Similarly, data on racial diversity within firms can highlight important trends and disparities. Detailed information on racial diversity is not yet widely reported, but there is a growing level of disclosure, attention, and action from many leading companies. Increased transparency is important, since we know that company leadership teams rarely reflect the composition of the communities they intend to serve. This disconnect is a consequence of systemic racism, and it contributes to perpetuating bias throughout our organizations, with negative implications for both business and society.
Even if we had much more data, for any question that is worthy of deep investigation, it's much more important to explore what lies beyond the surface level metrics. Board diversity is one small step toward examining diversity across multiple dimensions and throughout all parts of an organization. We believe diversity, in turn, is a step toward equity; equity is a step toward inclusion; inclusion is a step toward belonging; and belonging finally starts to approach the ultimate goal, justice.
Each individual metric is like one leaf on a tree; though we examine each leaf in depth, this is the beginning of our work, not the end. We always want to be connecting these specific indicators all the way back to the roots, to the most essential questions, to the most worthwhile ends.
"Diversity is a step toward equity; equity is a step toward inclusion; inclusion is a step toward belonging; and belonging finally starts to approach the ultimate goal, justice."
What can we contribute?
As fundamental researchers and active managers, we can contribute two essential ingredients as we all work toward a just society. First, we are analysts. We can promote transparency, analyze data, and report on insights that lead us to the next best question. We can encourage exploration of unstructured data, tools like machine learning and AI, and new information sources to give a more complete view of companies, activity, and impact. We can work to uncover and address bias in all forms of data collection and analysis.
Second, we are active managers. This means we have direct human conversations with company management teams as a core part of our investment process. We know that the path toward diversity, equity, inclusion, belonging, and justice requires personal engagement that goes above and beyond research and analysis. Our process allows us to be part of that collective work.
We know that diverse teams have potential to outperform, we know that these benefits accelerate as diversity develops into equity, inclusion, and belonging, and we know that a just society is better for all. We will be glad to see reported metrics expand and improve, and we aim to promote thoughtful disclosure and analysis along the way. We are even more enthusiastic about the benefits beyond metrics that will be created for all stakeholders, and for all of society, as we collectively work toward justice.
Learn more about our approach to research and ESG data by reading or bookmarking our 2020 Sustainability and impact report.
Learn more about Putnam's sustainable investing process.