Investors have an opportunity to drive faster progress in diversity, equity, and inclusion

• Corporate DEI programs have accelerated over the past several years.
• Investors have an opportunity to drive DEI progress by assessing opportunities and risks.

In 2017, music icon, Rihanna, launched her beauty brand, Fenty, offering 40 shades of makeup, and proving the huge market opportunity for inclusive and diverse products. Now with its Savage X Fenty brand potentially going public, the so-called "Fenty Effect"continues to showcase the power of an inclusive approach to product development and community building.

Even so, it took the national reckoning following George Floyd's murder in 2020 to motivate more companies to prioritize diversity, equity, and inclusion as a priority business goal.

Social justice issues moved to the forefront of American culture, and many companies installed chief diversity officers and pledged new DEI commitments. Some 68% of respondents to a March, 2022 survey, conducted by PNC Institutional Asset Management, reported they had launched DEI programs during the past 3 years.

As DEI platforms have grown, there are indications that investors are taking more interest in how companies are setting and meeting goals — and that both social responsibility and market forces are influencing them.

"With the widespread social demand for racial justice over the last two years, we've seen increased expectations of investment offerings that take into account a number of DEI characteristics,"Alistair Jessiman, managing executive of PNC Institutional Asset Management, said. The firm polled 240 C-suite and financial executives at for-profit and nonprofit organizations with annual revenues of $25 million or more.

"The data suggest that many organizations are exploring a number of tools at their disposal for pursuing DEI, which includes how they invest and with whom," Jessiman said. "Some focus on senior leadership, others on the overall employee base, and some on a broader set of programs, such as diverse supplier initiatives, or some combinations of those."

Institutional investors weighing risk and opportunities

The social shifts and stresses of the last two years have caused institutional investors to look more closely at the impact of their investments on communities and employees. "This issue comes up in every one of our client conversations," Jessiman says.

Survey respondents said that it is just as important to avoid investments that don't align with their values (86%) as it is to proactively invest in companies that do align with their values (90%). Sustainability investments are "the caboose coming along after the train," Jessiman says, giving leaders a framework to evaluate their operations top to bottom.

"Almost every client we have has gone through a re-look at their fundamental mission. Now that they've been activated they want to connect their investments to their own mission – that's the new part."

Evaluating a company's DEI exposes its risks and potential opportunities for investors, according to a report produced by PRI, an organization supported by the United Nations that advocates for responsible investment.

"Strong DEI within a company can positively affect decision-making, levels of employee engagement, reputation amongst stakeholders, innovation and access to untapped markets" reads the study, citing "The Fendy Effect as one example of the market power of inclusivity.

"There are also significant risks in failing to improve or ignoring DEI: for example, studies in the US show high incidences of sexual harassment can impact market performance, profitability, as well as staff productivity and turnover," the PRI report states.

The PRI report exhorts investors to take direct action to drive better DEI outcomes. "Change will not be brought about by minimal adjustments to existing policies and processes," it reads. "It will require a unified, holistic approach, pulling together a variety of voices — individuals, community groups, policy makers, corporations, and investors — and putting those most impacted at the heart of the conversation."