Companies that embrace diversity, equity and inclusion (DEI) are 35% more likely to outperform organizations that don’t prioritize DEI in their workplace. DEI is not a fad. A recent study revealed that 67% of employees claim their workplace, “require or offer trainings, lectures, webinars, or resources on DEI” and 71 % said that they believe such training was important to create, “a positive workplace culture.” But what does it mean to be a “diversified company” and how do factors like “equity and inclusion” benefit corporate performance?
What is DEI?
Diversity, equity, and inclusion (DEI) has emerged as a key strategy for developing a “positive work culture.” DEI is, “any policy or set of initiatives designed to make people of various backgrounds feel welcome and ensure they have support to perform to the fullest of their abilities in the workplace.” The creation of the Equal Employment Opportunity Commission (EEOC) in 1965 is considered the starting point for DEI since it empowered individuals to report companies that engaged in workplace discrimination, “on the basis of gender, race, age, pregnancy and more.”
Corporate DEI initiatives address inequalities related to race, gender, sexual orientation, age and other factors. As applied to the workplace, the DEI acronym means,
- Diversity: The presence and involvement of people from different origins and viewpoints, including those who have historically been underrepresented.
- Equity: The equal access to opportunity and the just, fair, and unbiased treatment of all employees.
- Inclusion: A feeling of belonging in a setting where everyone is respected, accepted, and feels at home.
Not surprisingly, policies that create and support a diverse and inclusive workplace can enhance decision-making, boost employee morale and ultimately improve corporate financial performance. DEI is positively associated with, “seven out of eight measures of future profitability, such as return on assets, return on sales, profits divided by employees, and sales divided by employees” as well as one- and three-year sales growth, three-year stock returns and dividends.
Controversies and Criticisms
Despite its benefits, DEI is not without controversy. A central debate focuses on the tension between promoting diversity and avoiding tokenism. Skeptics argue that some organizations may prioritize diversity for superficial reasons, without addressing underlying power inequities or promoting genuine inclusivity. This raises concerns about the authenticity and effectiveness of DEI efforts within corporations and investment portfolios.
Some conservative activists, lawmakers and corporate leaders have targeted DEI initiatives as unfair. Emboldened by the June 2023 US Supreme Court ruling that prohibited the use of affirmative action in university admission policies, they contend that DEI polices are themselves discriminatory and unjustified. This has led to a flurry of legal challenges and an unclear regulatory landscape. But the problems with DEI may be more about inadequate execution rather than the underlying concept.
DEI’s Role in ESG Investing
While DEI is a key component of the “S,” it is also within the other aspects of ESG since people are impacted by environmental changes and by how a company governs itself. Millennials and Gen Z are especially sensitive to these issues and are increasingly incorporating ESG considerations into their purchasing and investing decisions. Currently there are thousands of funds that claim ESG status and 85 % of investing professionals take ESG factors into consideration when trading assets. With the expansion of sustainable investing, DEI considerations will similarly intensify. The correlation between the two concepts can be seen best in the S of ESG, specifically the societal implications of corporate policies, ranging from workplace conditions and employee satisfaction to community impact.
The interrelationship between ESG and DEI is clearly high, but can these elements thrive on their own? Recruiting firms are claiming that there can be no successful ESG operation without the usage of diversity, equity, and inclusion policies. Indeed, the social aspect of ESG fundamentally requires DEI to generate a positive work culture and cultivate a secure work atmosphere.
On their own, ESG and DEI are able to promote social change and improve a company’s bottom line. When ESG and DEI are combined, the performance of an organization will gain momentum through the transformation of the workplace. This shift results in an environment where employees feel safe and are able to have increasing innovative thoughts. Together, these factors are able to build a long-term, sustainable and fiscally responsible workplace environment.
For more insights and guidance on navigating the evolving landscape of DEI and ESG investing, stay tuned to our blog for future updates and expert analyses.
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