Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Kasey Vosburg. She is from Sustainalytics. Hello.
Kasey Vosburg: Hi, Holly.
Black: So, we're thinking about International Women's Day this week, and you're looking at this from an ESG perspective, sustainable investing and matters of environment, social and governance. So, you've done some research into the representation of women and diversity at companies, and something you've been looking at is what you call human capital risk. Do you want to tell us a bit about what that is?
Vosburg: Yes, of course. So, human capital is one of 20 material ESG issues, or MEIs, in Sustainalytics ESG risk rating. And this issue captures all risks related to what is often a company's most valuable asset and that is, its people. So, we look at things like the strength of programmes to attract, develop and retain skilled staff. We consider performance KPIs like employee turnover and employee training. And we also assess the quality of a company's initiatives to achieve and maintain diversity, equity and inclusion within its workforce.
Black: So, let's talk more about that part of it. Why did you choose to delve into that bit of the topic when thinking about gender equality and what have you found?
Vosburg: Given this current environment, we wanted to understand how this gendered impact of COVID-19 affects companies' ESG risk profiles and which firms are best-positioned to manage these risks and ultimately preserve and improve gender equity in their organisations. And what the data show is that despite meaningful progress in recent years, there are still important gaps and also significant divergence in company performance on diversity metrics.
So, just to give you an example from the article, while nearly 80% of companies have a robust human capital development programme and more than 60% of companies have a strong anti-discrimination policy, less than 20% of companies have strong initiatives to ensure gender pay equality, and by that I mean things like conducting a global pay audit or reporting on gender pay gaps. And when it comes to board diversity, which is important for so many reasons, what we found is that there seems to be a disconnect between companies' intentions and their outcomes. And so, to explain that, although 43% of companies have some kind of diversity policy for board membership, and by that, I mean they have an intention to achieve diverse boards, only 27% of companies have more than one-third female representation on their boards. And even worse, 13% of companies, so over 550 companies we researched, have no female board members and over 700 companies have no female senior executives.
Black: So, that is quite staggering. What are the risks involved in that?
Vosburg: Yeah. So, this is so important because research continues to show that diversity and especially, diverse management teams is good for company value. Promoting diversity and inclusion can benefit businesses in a variety of ways. It can be by attracting and retaining key talent through better decision-making, improved innovation, stronger reputation and goodwill among customers and suppliers and all of these things really contribute to higher profitability. So, this matters now more than ever because with more women leaving the workforce, companies may face more competition to achieve these diversity premiums.
Black: So, Sustainalytics takes all these things into account and a lot of other things as well and wraps it up into a risk score. So, let's think about companies that are doing well in this space. What's one that stands out for you?
Vosburg: Sure. So, we do have quite a few companies that are doing well. One company here in the Netherlands where I'm located is the Dutch bank ABN AMRO. And now, the financial industry does have one of the worst gender gaps of all industries, and human capital is certainly a material ESG issue for banks. So, most things do have room to improve, especially when it comes to diverse management teams, and that includes ABN AMRO. But that said, the company does have a strong diversity program and a strong gender pay equality program that includes conducting a global pay audit. And so, for these reasons we consider ABN AMRO to have strong management of its ESG risk and to have overall a low ESG risk rating.
Black: Kasey, thank you so much for your time. For Morningstar, I'm Holly Black.
