Top ESG metrics to boost profitability

Asset and wealth managers are waking up to the fact that environmental, social and governance investing strategies are critical for future profitability. 

Still, it's a huge challenge for asset managers to embrace diversity and inclusion not just a corporate and social responsibility initiative, but as a core ingredient of a sustainable business model, speakers said during a panel discussion at the Women in Asset Management Summit last Wednesday. 

“Our industry is starting to wake up to the fact that it rings hollow to have us stridently advocating for diversity and inclusion in other sectors when clearly, financial services has a long way to go,” said panel moderator Kathryn McDonald, co-founder and head of investments at Radiant ESG. “We need to talk about cleaning our own house a little bit.” 

The message has to be clear to firms that diversity equals profitability, said panelist Emily Chew, executive vice president and chief responsible investment officer at Calvert Research and Management.

In fact, companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than companies in the fourth quartile, according to McKinsey & Co. Moreover, companies in the top quartile for ethnic or cultural diversity on executive teams are 36% more likely to have industry-leading profitability.

There's actually a potential penalty for companies not addressing diversity as a priority, as well. Companies in the bottom quartile for both gender and ethnic diversity are 27% less likely to achieve above-average profitability, according to McKinsey. 

“So it's not only on the upside, there's also risk on the downside,” Chew said. “Taking some of these insights into account, we've built a diversity factor, which looks at a number of different criteria, which are counting metrics like people of diverse backgrounds on boards.”

Notably, in August the Securities and Exchange Commission approved the new Nasdaq board diversity rule, which requires all companies listed on the exchange to disclose board-level diversity statistics. If a company doesn’t have at least one woman and one member who identifies as non-white or LGBTQIA+ on their board, the company must issue a statement explaining why. 

However, it’s important for firms to realize that they should track diversity not only at the board level, but also on executive and management teams, as well as among employees across the business. 

Tracking age is also a top metric, but it’s the most difficult to come by despite being a key factor in a company’s product design, said Kristin Hull, founder and CEO at Nia Impact Capital.

“With women and millennials, we need to have that representation, as far as product design,” Hull said. “Then we’ll look at how the company is built and if it is baked with purpose, meaning we're looking at products and services that are beneficial to women and people of color.” 

Hull said her firm also looks into corporate culture and whether employees are held on the balance sheet as an expense or an asset.

Another key metric is employee turnover, said Sarah Bratton Hughes, head of sustainability for North America at Schroders.

 “When we're looking at corporate culture where DEI is indicative, the one number if you were to hone in on everything is turnover,” she said. “That tells you a lot. There is not only turnover at the corporate level, but also turnover by gender, turnover by ethnicity, because anybody can go out and hire for diversity, but what are you doing to retain that talent over time?”