From gender to race

US leads in putting racial diversity on investors’ ESG agenda for companies

16 February 2021 Camila Sarmiento, ESG Analyst

From protests to the pandemic, 2020 brought racial inequalities into sharper focus. Companies, particularly in the US, face criticism of whether their corporate cultures support diversity. We believe race and ethnicity considerations have joined gender in the diversity discussion.

Investors who consider social factors, along with environmental and governance dynamics, will be better positioned to identify and manage risks and opportunities. Although coronavirus is global, the US has had more deaths than other developed economies. The pandemic has heightened racial disparities, where Black people represent 17 per cent of COVID-19 deaths in the US but only 13.5 per cent of the population, and hospitalisation rates are about four times higher among Black and Hispanic/Latinx people than among whites.

Inequality gaps have increased racial minorities’ vulnerability to the pandemics repercussions. Disparities in healthcare access, occupation opportunities, wealth and housing, have been made clear as a result of the pandemic’s economic consequences. White US households’ median net worth is nearly 10 times that for Black households. About 46 per cent of whites own homes but only it is 26 per cent for the Black population. The disparity for college degrees is 76 per cent versus 40 per cent. Minorities are also more likely to be uninsured, have chronic illnesses and shorter life expectancies.

Against this backdrop, corporations have publically responded. A failure to address racial equality and accountability in the workplace could lead to reputational risk and negative financial implications. But the reverse is also true: prioritising a safe work environment for all ethnic groups can improve employee loyalty and productivity. Assessing the impacts of racial diversity initiatives can be difficult for investors; not only is it difficult to integrate human capital and work culture into a discounted cash flow, but also little company data is publically reported.

Corporate responses to help access company engagement on racial diversity can be categorised as: listening and responding to stakeholders, fostering a diverse and inclusive workforce, and cultivating strong community relations.

Similar to gender, we expect more data to become available as companies feel increasing pressure from investors to report on racial and ethnicity data.

US president Joe Biden has made racial inequality a pillar of his ‘Build Back Better’ plan. Executive orders and memoranda have already started to cover discrimination and disparities in COVID-19 outcomes by minority groups, the minimum wage, affordable housing, the criminal-justice system, and environmental injustice.

His plan also has financial implications for corporations, including disclosing racial metrics and ending pay discrimination. The president’s plans to address racial inequality appear largely aligned with commitments already set in motion by some companies.

We expect the focus around racial disparities to continue into 2021 and beyond. This renewed focus could potentially result in companies including a more diverse talent pool, enhanced recruitment, re-evaluated diversity training, increased investments in minority-owned businesses and participation in the community, plus reporting on diversity metrics.

First published 3 February 2021. Would you like to find out more? Click here to read the full report (you must be a subscriber to HSBC Global Research).

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