Racial and ethnic inequity is a systemic risk that "threatens lives, companies, communities, and our economy", according to one of the largest global fund managers.
State Street Global Advisors (SSGA) president and chief executive Cyrus Taraporevala has issued his annual letter to boards of major global listed companies, outlining the fund manager's proxy voting agenda for 2021, and the fund manager's ongoing stewardship work.
SSGA has identified lack of racial, ethnic, and cognitive diversity as a business risk for companies and has asked companies in which it holds shares on behalf of clients to disclose information on racial and ethnic composition. This builds on work that commenced last year.
"Research has shown the positive impacts diverse groups can have on improved decision making, risk oversight, and innovation, as well as how management teams with a critical mass of racial, ethnic, and gender diversity are more likely to generate above-average profitability," Taraporevala said in the letter.
"Likewise, companies that promote workforce diversity and inclusion through transparent hiring, promotion, and wage practices have seen improved productivity, revenues, and market share, while homogenous boards and workforces tend to refrain from challenging prevailing views.
"The preponderance of evidence demonstrates clearly and unequivocally that racial and ethnic inequity is a systemic risk that threatens lives, companies, communities, and our economy — and is material to long-term sustainable returns."
SSGA contacted global company directors in August 2020 to advise companies that their diversity engagements had expanded to include discussions of race and ethnicity, and Taraporevala's letter outlined the further steps the US$3 trillion investment manager will take.
In 2021, SSGA will vote against the chair of the Nominating and Governance Committee at companies in the S&P 500 and FTSE 100 that do not disclose the racial and ethnic composition of their boards. Further, from 2022, SSGA will also vote against the chair of the compensation committee at companies in the S&P 500 that do not disclose their racial and ethnic diversity statistic via a document called the EEO-1 Survey responses.
"The bulk of the letter this year was around racial and ethnic diversity," Benjamin Colton, global co-head of asset stewardship at SSGA told Financial Standard sister title FS Sustainability.
"The accompanying guidance piece is an expansion on a long-standing commitment to pushing for increased diversity within portfolio companies."
Colton highlighted lack of diversity at all levels of companies as a business risk.
"Academic evidence points out that cognitive diversity is correlated to higher growth, higher innovation, and thinking about risk from different perspectives," he said.
Gathering data on companies' diversity policies and implementation, how human capital is managed more broadly, and the demographic makeup of companies is a fundamental challenge.
"At the board level, we're looking for board oversight as well. What are the diversity related risks that a company faces, and the opportunity set as well? How does the board look at this as well? We're also looking at companies who explicitly outline oversight of social issues into their company charters as well, because it's a financially material set of issues that boards need to consider," Colton said.
The racial and ethnic diversity engagement will encompass US and UK companies in the first phase, and SSGA is currently working on a report that will outline best practices and what they believe represents strong disclosure.
"SASB has been a really good starting point for us, and we like it because it focuses on financially material information," Colton said.
"I know they have elements of human capital management within that, and they're continuing to look deeper in the area.
"I think in the next 12-24 months, you're going to see a revolution in the quality and quantity of disclosure relating to human capital management, and I think there will be more standardisation, certainly across companies and within the US or specific countries as well."
SSGA has previously announced that, from 2022, it will vote against director appointments in listed companies in the US and UK that do not have at least one board member from an underrepresented community. The engagement and voting approach to racial and ethnic diversity is built on the approach to gender diversity that SSGA has conducted.
"If you look at our Fearless Girl campaign, we started with the target of having one female director, and we continued to expand the focus across geographies and escalated the guidelines," Colton said.
"I could envision a similar approach here. The underlying story here is, one director is not the end game. We're not going to be satisfied with the one director. It's a powerful first step, but ultimately we want to see that critical mass, we want to see the conversation shift from why do we need one to why don't we have diversity more generally on our board, and I think that mindset shift needs to happen over time."
Colton emphasised that the examination would also be turning inward, as SSGA addresses racial and ethnic diversity within its own company.
The letter from Taraporevala also reiterates SSGA's approaches on climate change. Last year, SSGA joined Climate Action 100+.
"That focus will continue on, and we will take a much more targeted approach this year and the coming years, but even though we have a targeted approach, we want all companies to consider the systemic risks that are associated with climate change and think about opportunities relating to the transition to a low carbon economy," Colton said.