The importance of organisations’ commitment to Diversity, Equity & Inclusion (DEI) agendas has never been more evident than it is today. There is irrefutable evidence that organisations who make strides towards DEI reap the rewards in their productivity and profits1. The imperative is not only commercial, we have also seen a wave of reporting rules and regulations from governments and unions to create a culture of transparency about the impact of companies on our planet and society. For example, the UK government’s Gender Pay Gap reporting regulations introduced in 2017 requiring employers to publicly disclose the average earnings of men and women across their workforce2. Another growing trend, though not currently written into regulation, is the publication of ethnicity pay gaps too (see Baringa's 2022 report here). DEI consciousness and end-to-end organisational commitment is only going to become more important in the years to come.
Why are we raising this now?
Because it’s in the directive and we need to think beyond carbon!
The new Corporate Sustainability Reporting Directive (CSRD)3 from 2022 replaces and deepens the Non-Financial Reporting Directive. This enforces the European Union’s change in rules, requiring more large and listed companies to disclose the social and environmental risks they face (e.g. disruption in the supply chain interrupting merchandise supply) and the impacts of their activities on people and the environment (e.g. human rights violations within the supply chain).
CSRD will include reporting on business models, strategies and targets, policies, risks and due diligence. This will go beyond operations, products and services, extending to both the upstream and downstream value chain. And crucially, this directive will challenge ‘carbon tunnel vision’, pushing a more holistic approach to sustainability to include DEI, biodiversity loss, water crisis and so on; all of which require imminent action given the lead time and complexity of driving change.
What does this mean in reality?
This new wave of reporting, “will make more businesses accountable for their impact on society”, says Minister of Industry & Trade, Czech Presidency of the Council of the EU, Jozef Síkela. It will increase transparency and comparability across and within industries through establishing consistent sustainability reporting standards. It serves investors and other stakeholders by ensuring they have access to the information they need in a digitised format to assess sustainability-related investment risks (this will also be third party assured from 2025). It will also support investor decisions to channel financial resources to organisations that are actively addressing social and environmental problems, when previously investors have reported concerns about the information available to them when evaluating ESG priorities4.
The first companies will have to apply the new rules for the first time in financial year 2024, for reports published in 2025. It is estimated to impact 50,000 companies. This will include all companies listed on the EU regulated markets, any large EU company or subsidiary of a non-EU company and insurance and credit institutions (criteria details can be found here). It is then to be expanded to listed small- and medium-sized enterprises in the following 2-4 years. This change is inevitable and how organisations respond will predict their standing as a viable investment. We can only presume more demand for transparency will follow, so at the very least organisations need to understand what this directive means for them and what they can report on.
What are the implications for DEI agendas?
ESG is a framework used by investors who take environmental, social and governance factors into account as well as organisations’ financial indicators5. Diversity, Equity & Inclusion (DEI) are among the ‘Social’ factors considered and measuring progress towards inclusion falls within the parameters of ‘Governance’. DEI priorities will be under even greater scrutiny with the introduction of the CSRD, as organisations’ progress will be available for anyone to see. Emphasising its importance, global recruitment firm Randstad’s 2022 report highlighted that 41% of respondents would not accept a job with an employer who was unwilling to make efforts to improve their DEI record6.
Consequently, it is expected that many businesses will need to transform their DEI decision-making and commitments to create new stories to be shared with their investors, employees, customers, and suppliers. This focus will need to reach far wider than building reporting capability on key indicators of diversity and inclusion. It will include the identification, assessment and tracking of DEI-related information and risks they are facing (e.g., reputational risks associated with poor representation of diverse or minority groups). They will then need to draw up and implement DEI initiatives, policies, targets and KPIs that they can report on to demonstrate their commitment to bringing an end to any adverse impacts connected with their activities and/or to positively impact their stakeholders and wider society.
Why is this ultimately good news?
It should be expected that there will be significant upfront costs for companies as they set themselves up for the CSRD, but in the longer-term the directive aims to “reduce the unnecessary costs of sustainability reporting for companies”, as the standards will remove the need for additional, one-off, often manual information requests from stakeholders. Moreover, with nearly two-thirds of investors preferring active funds to integrate ESG7 and the preference for ESG only expected to continue to rise, companies must consider how they will respond if they want to remain attractive and competitive. Shareholders and investors want to invest in sustainable and resilient businesses, that means businesses that are focusing on ensuring the DEI agenda is seen as an asset and not a liability. This will only become more evident as stakeholder capitalism (long-term value creation by focusing on the needs of business stakeholders) advances as the predominant business model.
Besides increased investment potential, there are many other benefits to be expected from responding to the challenge of CSRD too. This regulation serves to combat the accountability deficit and declining citizen trust in businesses observed in the last decades3. This will translate into greater talent attraction and retention, consumer loyalty, customer satisfaction and increased net promoter scores. The improved metrics and methods will also serve to inform and ensure business models and strategies. Whilst considerable leadership bandwidth is consumed with the navigation of today’s macroeconomic turbulence, CSRD can provide the impetus for keeping DEI as a strategic priority, trusting that in the long-term organisations will see stronger performance and a better world.
Our recommendation
Act now to find out if and when this legislation will impact your business. There is opportunity to get ahead of the curve and really move the dial on DEI, to attract employees, shareholders and investors of the future.
To find out more about how Baringa can help you on your DEI agenda and ESG more widely, please contact Katy Mirzaie, Salina Docherty and Elle Prichard.
References
- McKinsey (2020) Report – Diversity wins: How inclusion matters
- The Equality Act 2010 (Gender Pay Gap Information) Regulations 2017
- The Corporate Sustainability Reporting Directive, European Commission
- PWC (December 2021) – Global Investor Survey (PDF)
- CFA Institute – ESG Investing and Analysis
- Randstad (2022) Workmonitor Report – A new era in the #howwework revolution
- ESG Global Study (2022) – Harvard Law School Forum on Corporate Governance