Diversity, equity and inclusion (DE&I) brings tangible benefits including greater innovation, higher employee engagement rates, greater outperformance and in turn higher profitability of companies.
Impact bond investing – is Orange the new Green?
Broader scope social bonds are good avenues to finance projects targeted at underrepresented groups.
What is Diversity, Equity and Inclusion (DE&I)?
DE&I are closely linked values held by organisations that support different groups of individuals, including people of different races, ethnicities, religions, abilities, genders and sexual orientations. Diversity as represented in the workforce, includes 1) gender diversity, 2) age diversity, 3) ethnic diversity, and 4) physical ability and neurodiversity. Equity, on the other hand, refers to fair treatment for all people, so that practices in place ensure that identity is not predictive of opportunities or workplace outcomes. This is different from equality, which assumes that all people should be treated the same, for equity takes into consideration a person’s unique circumstances, adjusting treatment accordingly so that the end result is equal. Finally, inclusion refers to how the workforce experiences the workplace and the degree to which firms embrace all employees.
DE&I is also one of the key ESG factors to determine a company’s social and governance standing for both investors and customers. Beyond enhancing a company’s public image, we consider the tangible benefits that DE&I can bring to companies.
Why DE&I matters and the real benefits it brings
DE&I factors can be incorporated by analysts in their fundamental research analysis of companies as a driver for longer-term outcomes. As seen from the exhibit below, share prices of companies which fare well on this front have outperformed the broader markets over the longer term.
Exhibit 1: Outperformance of companies that fare well in terms of DE&I
Source: Refinitiv
Why is this the case? Based on numerous studies that have been done over the years, it has been found that DE&I results in greater innovation, higher employee retention rates, greater outperformance and in turn higher profitability.
Impact Bond Investing - Is Orange the new Green?
Diversity and inclusion are correlated with business and financial performance. Diverse workforces are more likely to drive competitive advantage across talent, innovation and markets and outperform over the long term. While the sustainable finance market has grown significantly over the years, compared to other thematic investing such as climate change, gender-lens investing is still at its infancy stage, with only USD17 billion in assets in gender-labelled financial products out of over USD40 trillion in the global sustainable investment universe in 2020. In this aspect, the global debt and loan capital markets (via Social, Gender, Sustainability, and Sustainability-linked Bonds and Loans) are potential channels through which capital can be directed towards reducing gender inequalities and embracing inclusion.
Achieving the United Nations Sustainable Development Goal (SDG) 5: Gender Equality has the potential to positively impact several other SDGs such as ending poverty (SGD1); eliminating hunger (SDG2); ensuring health and well-being (SDG3); ensuring inclusive and equitable quality education (SDG4), promoting sustained and inclusive economic growth (SDG8) and reducing inequality within countries (SDG10). The Covid-19 pandemic has disproportionately impacted women, widened the gender gap and made the case for gender financing even more critical. With less than a decade remaining to achieve the 2030 Sustainable Development Goals, financing solutions that drive gender equality should be accelerated. Besides gender-labelled bonds, the broader scope social bonds are also good avenues to finance projects targeted at low-income groups, persons with disabilities, sexual and gender minorities, or other groups.
Aligned to the SDG5, Gender Bonds are debt instruments which integrate gender considerations into their objectives with the purpose of raising awareness of gender inequality and empowering women. In March 2022, the Development Finance Corp (DFC) in the US partnered other international organizations to issue a set of guidelines, called the Orange Bond Initiative, which aims to empower 100 million women and girls worldwide by unlocking USD10 billion in capital by 2030. Consequently, the Orange Bond Principles and first Orange Bond were introduced in October 2022 and December 2022 respectively. Proceeds from Orange Bonds must go to projects and enterprises that substantially benefit women or gender minorities, ensure a gender equitable workforce and/or inclusive value chain, or are majority women-owned or led. Issuers of the bonds must maintain substantial gender diversity in their leadership team or the team working on the bond.
In order for Gender Bonds or Orange Bonds to gain more prominence, increased sovereign issuance of Gender Bonds and incorporating gender characteristics into the mainstream Green Bonds could be ways through which we can progress towards gender equality and realisation of SDG5.
Exhibit 2: Snapshot of gender equality across the Sustainable Developed Goals
Source: United Nations
What this means for investors
As investors consider ESG factors as drivers of returns and indicators of risks for their portfolio investments, we believe DE&I considerations can provide valuable insights into how companies are able to deliver sustainable sources of value.
Companies that lead their respective industries in DE&I aspects may produce more sustainable business results and lower risks than peers that lag in these areas. In terms of investment instruments, a wider range of bonds such as Gender and Orange Bonds, are now available for investors who seek to achieve specific diversity outcomes in communities and societies.
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