12 October 2023 
This blogpost is originally published by Rimes.
ESG-focused investing is the hot topic of the moment for the investment community, with regulatory bodies starting to sanction and punish firms for false representation of funds, holdings, and performance. This thought-provoking piece takes a closer look at some of the complexities involved in tracking ESG factors, particularly the S pillar of ESG and how there is more to DEI than meets the eye – quite literally.
“Demand from investors for ESG-focused investment products and solutions has grown exponentially in recent years. European regulations such as the Sustainable Finance Disclosure Regulation (SFDR), Corporate Sustainability Reporting Directive (CSRD), EU Taxonomy Regulation, and Shareholders Rights Directive (SRD II) have reinforced the need for asset managers to incorporate ESG considerations into their investment processes.” EFAMA statement in response to the European Commission’s proposals for regulation on ESG ratings and data providers.
The S factor is subjective and highly emotive
While still relatively nascent, ESG data is no longer a ‘nice to have’, as it is now essential for all investment firms to have fast, easy access to verified ESG data sets. However, arguably, the most challenging pillar of ESG is the ‘S’, or ‘social’ factor. Unlike environmental data, it can be subjective and often highly emotive. DEI – Diversity, Equity, & Inclusion – are some of the more defined areas of the ‘S’ factor and directly impacts business development, community engagement and brand equity. Any firm serious about future sustainability must invest in a robust DEI strategy now and find ways to report to the broader world about its effectiveness. Its purpose is to deliver desired business growth outcomes and attract investors looking to boost their portfolios.
Why is DEI so hard to measure?
“Planet isn’t necessarily more important than people; it’s just much easier to measure. Investors like measuring things they can put into their models, and carbon is easy to quantify.” Unnamed Fund Manager – reported in the Stanford Social Innovation Review.
- Quantification – Once social impacts are standardized and classified, they must be adequately quantified – but in what units?
- Reporting – In the traditional ESG paradigm, reporting is about disclosing “material” risks but is more than just assessing them. It also needs to consider the material impacts. A company’s affirmative investment in DEI outcomes can significantly mitigate talent loss and reduce threats to brand reputation.
- Geographical differences – A further factor is that no one size fits all. Each country is very different in its racial and ethnic makeup, which can have knock-on effects on the companies located there. A perfect example is Microsoft, which has a vast global presence; therefore, the DEI criteria for the UK business have to be very different from those of China or the Middle East. It is a complex problem and requires unique expertise to create models that consider all of these variances and provide investors with a data set in which they can be confident.
- Holistic approach – A holistic approach is essential when discussing, measuring, analyzing, or assessing DEI. Most DEI efforts only focus on a single or maybe two DEI components. A single or narrow approach to DEI can lead to lost opportunities or severely reduce the investment return.
DEI is more than just gender
In our experience, the holistic approach has proven to be the most effective. All too often, DEI is perceived to be just about gender or ethnicity when, in fact, it includes several variables. A recent article published in Responsible Investor – comments on how Nordea Asset Management (NAM) has “…expanded the investor universe of its Global Gender Diversity Fund to focus on engagement and other DEI factors, but the resulting downgrade from Article 9 reveals uncertainty about the classifications of these thematics funds under SFDR.”
Nordea is still committed to maintaining a minimum of 50% of the fund in sustainable investments but has made this decision as they believe “societal demands for change to improving diversity and inclusion beyond just gender representation.”
However, it is also essential to understand that DEI measurements are not linear; they involve more than data. It requires specialist expertise to examine the issues relating to politics, religion, disability, health, age, scalability, etc. All of which must be reviewed in parallel and by geographical region.
DEI is no longer a checkbox activity
Environmental, Social, and Governance (ESG)-focused investing is now center stage, and its importance must not be underestimated or ignored. Globally the Regulators are rigorously imposing sanctions and fines on firms guilty of misrepresenting funds, holdings, and performance and this trend is intensifying, making DEI data a business-critical requirement for all investment firms. As a result, DEI is no longer a checkbox activity but is a multifaceted requirement that directly influences business development, community engagement, and brand equity.
Why this matters for investors
We understand that to survive and prosper in today’s highly regulated and increasingly socially aware business environment, it is imperative that our clients fully understand the complete profile of their investment portfolios, and equal importance is that their claims are valid. We all know what happens when firms don’t take these responsibilities seriously, which can result in punitive fines, reputation damage and lost business opportunities, demonstrating the potentially dire consequences of not following the rules.
Therefore, the ability to effectively track and manage ESG data is a business-critical activity requiring access to validated data sets underpinned by expert skills that are in very short supply. By integrating DEI metrics, investors gain a more holistic view of a company’s risk and growth potential, ensuring a well-rounded and future-proof investment strategy. This is why Rimes is committed to making DEI data readily available to enable better-informed decision-making for our clients and to foster a more inclusive financial environment.
Showcasing innovation
As Rimes continues its relentless quest to ‘make investment data work’, we have partnered with Denominator to provide our clients with easy access to highly respected and reliable DEI data, covering scores and ratings on board, executive, and company levels across 15 DEI dimensions such as gender, race/ethnicity, age, disability, sexuality, education, and more. Denominator is an innovator in this field, boasting the world’s largest DEI database, covering over three million companies.
