Demonstrations focused on racial equity and justice — as well as inequities exposed by the COVID-19 pandemic and the accompanying economic downturn — are putting new pressure on businesses to address these issues and to disclose their progress in their corporate social responsibility reports.
“The conversation has picked up exponentially in the past eight months,” said Maura Hodge, CPA, KPMG’s lead U.S. partner for ESG assurance. “Having worked with [environmental, social, and governance reporting] for 10 years, the number of conversations I’ve had this year has been amazing.”
Like many companies, enterprise software maker SAP, which ranked No. 1 on Forbes’ America’s Best Employers for Diversity 2020 List, issued a statement last summer that pledged “to speak up, connect with the experiences of its Black colleagues and other people of color, reaffirm its commitment to diversity and inclusion,” and increase investments in a variety of social justice organizations and efforts.
SAP has a long-standing commitment to diversity, spokeswoman Bettina Wunderle said. In its annual corporate social responsibility (CSR) reports it has listed diversity and inclusion (D&I) indicators for gender inequality, but it’s considering expanding those disclosures for its 2020 report.
“We are currently examining whether we will include aspects of social justice/ethnicity in the Integrated Report 2020,” Wunderle said in an email.
SAP isn’t the only organization considering changes in its ESG reporting. The pandemic and this year’s social unrest and economic turmoil have raised the profile of CSR activities.
“There’s certainly more attention being paid to things like diversity, equity, and inclusion at this point,” said Meredith Jones, global head of responsible investing and head of emerging and diverse manager research at global professional services firm Aon PLC. “It would be hard to not be having those conversations in light of the conversation that’s particularly happening in the United States right now.”
Jones and others say that investors — from individual shareholders to institutional investors — want to know how companies are addressing inequality and social problems.
“We’re seeing a broader cross section of asset managers and shareholders start to ask these questions,” Jones said. “Companies are having to respond by providing more transparency about what kind of metrics they have, what they’re tracking.”
The accounting profession is paying attention. In August, PwC released its first D&I report, the latest step in a decades-long effort to improve the firm’s diversity and be more transparent about equity and inclusion issues.
“It is critical that corporate America address its D&I issue by tackling it like it would any other business problem,” PwC US Chair and Senior Partner Tim Ryan, CPA, wrote on the firm’s corporate blog. “For us, this means we have to use an approach that is data-led, rooted in analysis, and has a defined and deliberate strategy that is informed by our purpose and values. We recognize that while we have made progress over the years, we have more work to do.”
In early 2018, BlackRock Chairman and CEO Larry Fink made headlines when he told CEOs of top companies that if they wanted BlackRock’s support, they must demonstrate how they’re protecting the environment and improving society.
As the world’s largest asset manager, with more than $7.3 trillion under management at the end of the second quarter of 2020, BlackRock made clear in its missive that social responsibility was no longer optional.
“Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and, in turn, a higher cost of capital,” Fink wrote. “Companies and countries that champion transparency and demonstrate their responsiveness to stakeholders, by contrast, will attract investment more effectively, including higher-quality, more patient capital.”
In taking this stand, he joined a decades-old investor movement that has urged businesses to consider not just profit, but broader social good. Those ideas are increasingly mainstream.
A 2017 Morgan Stanley survey found that 75% of individual investors, including 86% of Millennials, are interested in sustainable investing — putting money into companies that protect the environment and improve society. And there’s a growing conviction among investors that social problems represent a long-term risk to business profits.
“If you pull back the curtain and you see how underrepresented, let’s say, Black Americans are in many, many strata of corporate life, it would be really difficult not to acknowledge that we have a problem,” said Blaine Townsend, executive vice president and director of sustainable, responsible, and impact investing at Bailard Inc., a San Francisco-based wealth and investment management firm. “Investors should see that as a real investment risk over time.”
Broader social problems, such as racial inequity, pose a significant threat, Townsend said.
“Income inequality is getting worse, and that’s a real economic issue,” he said. “That’s a real investment risk that I think Wall Street really needs to pay attention to.”
Data and disclosure
KPMG’s Hodge said companies should not just disclose their current D&I measurements, but rather set targets and explain how they hope to reach those goals.
“It is absolutely critical that they’re showing what their progress is and where they’re trying to get to,” she said. In addition to the quantitative data, such as the Global Reporting Initiative’s D&I opportunity disclosures, companies should include narrative details to explain their approach and programs. Accountants have a critical role to play in this reporting, Hodge said, because of their training and experience in collecting, understanding, and disclosing data based on published standards.
“I think they’re well positioned, once they understand what the data is meant to represent, to be able to build the processes and controls around the metrics to be able to consistently and accurately represent this information,” she said. “The reason that’s important is because it then gives us clarity and comparability of data across companies.”
Many companies start by reporting some subset of their EEO-1 data — employment data broken down by gender, race/ethnicity, and job category that large businesses are required to report to the U.S. Equal Employment Opportunity Commission. With that in hand, the next step is to set goals.
D&I initiatives often include targets related to having minorities in a company’s workforce, especially in management and leadership ranks, as well as on the board. Pay equity is another big focus.
Companies also need to consider how D&I relates to their strategy and operations, said Christina Shim, managing director at Palladium, a global impact consulting firm.
“There are so many studies that have come out that show that diverse thinking and diverse ways of doing business are really core to business growth,” she said. “We do need to move away from the compliance-oriented mentality toward something that really is core to the business.”
The first step, Shim said, is to “take stock of your ecosystem” — customers, suppliers, distributors, and so forth — and figure out what improving D&I means for your business. How a technology company tackles these issues will be different from how a retailer or consumer-goods maker handles it, for example.
“For me, the key message is that to effectively address diversity and inclusion requires the company to have a clear understanding of why the topic matters to its long-term performance,” Hodge said. “Once everybody’s on board and that’s clear, it makes embedding these policies a business imperative. That then leads to the development of initiatives and changes in behavior that result in meaningful and sustained changes within the organization.”
— Mark Tosczak is a freelance writer in North Carolina. To comment on this article or to suggest an idea for another article, contact Chris Baysden, a JofA associate director, at Chris.Baysden@aicpa-cima.com.