Racial Equity Audits are the practice of independently reviewing an organisation’s policies and ascertaining how well they encourage and promote inclusion, diversity, and racial equality. They’re a recent introduction to ESG investing.
Although working towards racial equality within corporations has been on the agenda for a while, the raising of the bar by Black Lives Matter has really brought the quest for racial equity back into focus. Multiple studies have indicated that racial inequity can damage the economy, which has motivated the financial world to take notice and do something about it.
Actors within the investment space have started to regard insufficient racial equity policies as a risk to their business. Bad press is landing at the door of companies who maintain (or are perceived to maintain) discriminatory policies or internal procedures. And because of the reputational damage of this bad press, companies are seeing their shareholder value affected.
In stark contrast, companies that are inclusive and diverse are more likely to do better than their less diverse competitors, which has led investors to start considering how corporate policies, processes, and products influence things like diversity, inclusion, and civil rights within the companies that form their portfolios. This has motivated businesses to address racial inequalities and make commitments to do something about them.
Will racial equity audits alter business practices?
We have already witnessed major corporations make assurances as a direct result of findings from racial equity audits. One such example was Starbucks introducing multiple initiatives to improve inclusion and tackle inequity after a third-party racial equity audit. The global coffee chain committed to the following actions:
- BIPOC mentorship initiatives
- Employee training focused on foundational inclusion and diversity learning modules
- Establishing corporate diversity goals
- Making compensation incentives for executives more diverse
It’s not year clear whether Starbucks will roll out these initiatives globally or whether they will be implemented solely in the United States, but at least it’s a step in the right direction.
And Starbucks isn’t the only corporation open to change – Airbnb and Facebook have also completed racial equity audits in recent times. What’s more, BlackRock, Morgan Stanley, and Citigroup have conducted audits in the financial world. Morgan Stanley initially urged its shareholders to reject the audit proposals but carried one out all the same.
This was mirrored in retail, as Amazon felt that the Human Rights Assessment they carried out meant there was no need to do a racial equity audit. But the US Securities Exchange Commission suggested that Amazon should, in fact, carry out an audit, and it was put to the vote at the company’s next AGM.
Amazon shareholders were warned of equating racial equity audits with Human Rights Assessments by Thomas DiNapoli, who was responsible for filing the original proposal with the company. DiNapoli wrote an article that emphasised the importance of recognising that companies still face issues relating to discrimination, equity, diversity, and inclusion, even if they have completed a Human Rights Assessment.
Racial equity audits for shareholders: What does it mean?
An alarming piece of research conducted by Citigroup found that the racial wealth gap could have cost the US economy $16 trillion over the last two decades, predominantly as a result of discriminatory policies relating to black Americans’ wages, education, housing, and investment. Further research conducted by the WK Kellogg Foundation suggests that if the racial equity gap is closed, the United States could add as much as $8 trillion to its economy by 2050.
But this issue isn’t just an American one. Henley Business School conducted research into the UK economy and discovered that British companies that tackle inequality and racism could expect to see average revenues that are 58% higher over a three year period, when compared to companies who do nothing about such issues that arise in the workplace.
For us, this indicates that large sectors of the general public have woken up and are motivated to guide the corporate ship into different waters, which is something that investors simply cannot ignore. Companies that promote inclusion and equality are much better placed to facilitate long-term value and, therefore, shareholders who pretend the issues don’t exist will be left behind.
There’s still an awful long way to go, but it’s reassuring to see the long-awaited focus of the social aspects of various ESG initiatives. Making people aware of racial inequality within corporations will increase transparency, create clarity around boundaries, and ultimately strengthen our understanding of the ESG framework in the business world. Investors have the power to influence change by understanding this framework.
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