In recent years, ESG issues have become central to the concerns of investors, shareholders, and customers alike. However, the component parts of ESG are, perhaps, unbalanced in the amount of concern they receive. Yes, much emphasis is placed on the environmental problems a company faces, those related to the physical effects of climate change, principally because these are ESG issues that can be ‘visibly’ resolved, as well as that of resource management and related cost savings. However, the social and governance aspects—such as inclusivity and diversity, along with racial equity— are, till now, less ‘visible’ aspects. 

The issue comes loaded with questions. Can this be given priority in a world preoccupied with generating higher financial returns? Is racial equity the same as 'diversity, equity and inclusivity' (DEI), or different? How does encouraging racial equity audits in companies help with the aim of social justice for all? And, are companies interested in taking positive action, changing their perspectives and being self-critical, all to protect and respect diverse talent and build inclusive cultures? 

Yes, employers must always take bold steps to accept a disadvantage, then build the commitment to actively change it and see the potential benefits. The question is whether some see this as a 'trend'.

What Is Racial Equity? 

By focusing on eliminating inequities and enhancing outcomes that are fair to all, progress can be made towards a shared vision and objective of achieving racial justice, and is possible when no one race determines the socioeconomic status of another. No matter where they reside or how they identify, it is when organisations give everyone what they need to succeed, as opposed to equality, where everyone simply receives an equal amount of resources. 

Three categories can be used to categorise racial inequity. The first is individual racial inequity, which refers to how someone is treated unfairly based on preconceived ideas about a person's race or group of people. 

The second is institutionalised racial inequity, where policies, practices, and processes typically favour white people at the expense of people of colour. For instance, the institutions of education, the criminal justice system, and health care are all affected by institutional racism. An example of this could be passengers of a specific ethnicity being frisked at international airports. 

Thirdly, as a result of historically and culturally racialised settings, structural racial inequity refers to institutional policies and programmes that have a negative impact on communities of colour in comparison to other (white) communities. Wider political and social disparities within society, such as higher rates of poverty for Black people or higher rates of COVID-19 death among people of colour compared to whites, are examples of structural racism.

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Is Racial Equity similar to DEI? 

Although some people can mistake racial equity for diversity, equity, and inclusion (DEI), both are distinct. Diversity is essentially made up, for example, of individuals from many nationalities or ethnic backgrounds. As such, the variety of nationalities represented in the workforce can be used as one measure to gauge workplace diversity. On the contrary, inclusion essentially refers to the representation and involvement of those nationalities in the labour force.  

In this sense, racial equity is distinct because it focuses on making measurable changes in the lives of people of colour, and is the intentional and ongoing process of changing policies, practices, systems, and structures which focus on people of colour. It recognises the disparities and economic factors that disadvantage persons of different races and pose a barrier to achieving racial justice. 

Data Via Audits

In order to achieve social fairness goals, companies make use of racial equity audits to examine the factors behind discrimination in the workplace, and the results are usually made public to make the overall efforts of a company towards racial equity more transparent. The aim is not to criticise a company’s stance on racial equity goals, but rather to make racial justice an important part of their overall business operations by auditing it to identify any weakness and areas for open improvement. 

A helpful toolkit on Racial Equity Impact Assessments (REIA), by RaceForward, is available here.

How is DEI relevant to ESG? 

ESG is concerned with how a company's performance is measured in a socially responsible manner, as well as how the company's operations are affecting the environment and society at large. One may therefore highlight the significance of DEI in ESG problems, in so much as each of the three elements of ESG is strengthened by DEI. 

A varied workforce is more likely to be understanding about how environmental issues affect various regions and communities, allowing the company to implement policies that cater to local needs. As a result, it is simpler to embrace structural and operational improvements that benefit people, the environment, and their bottom line. They also increase productivity and efficiency. Companies are submitting DEI reporting data that demonstrate the company's DEI culture, and this forms a reliable source that can be shared with leadership, recruiters, candidates, and workers in order to increase transparency in how the company sees itself and how it chooses to operate.    

Diverse Talent

A workforce with diversity helps bring to the table global solutions that might be missed out if diversity and inclusivity are not included. Creating a workplace for participation, where everyone can be themselves, enhances employee creativity and productivity, and allows one to hear other points of view, and as such a greater breadth of potential solutions. All this is underpinned by the UN Sustainable Development Goals (SDGs), which specifically point to women (SDG 5), discrimination (SDG 10), and inclusiveness (SDG 16) as key drivers for success.

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Protected Characteristics and ESG

A racial equity audit's primary goal and significance is to assess how a business perpetuates racial discrimination, and how it may enhance its policies and procedures to address systemic bias and discrimination. The social aspect of ESG is concerned with how a company's operations deal with fair and equal treatment for people of all races, but also for all other 'protected characteristics': ethnic groups, religion, sexual orientation, gender, age, disability, as well as governance policies and compliance that support the responsible management of business interests.  

Racial equity can be included in the ESG's social component and aid in sustaining diversity and inclusivity across all organisational stakeholders. It also helps in educating investors about the development of non-financial value within the organisation, specifically in fostering an appreciation for a diverse workforce, free from exclusion or prejudice, where 'differences' are advantages, both from a social and business competitiveness point of view. 

According to a research report by McKinsey on racial equity commitments, out of 1,369 Fortune 1000 companies surveyed between May 13, 2021, and October 10, 2022, it was discovered that pledges to advance racial fairness totaled roughly USD 340 billion, of which USD 141 billion came in the previous year, between May 2021 and October 2022. Additionally, the majority of promises are made by financial sector companies. ESG issues and racial equity are relevant for all organisations, no matter the economic sector or activities.

Takeaway - Inclusive Cultures Win

Racial equity audits are important for investors, shareholders, employees, and clients because they concentrate on some of the company's core operations, such as senior management diversity, how customers are treated in a company's physical locations, and the general targeting of products that include diversity and inclusivity. The outcomes of audits can assist companies in developing a strategic engagement plan to enhance racial equity in the future. 

Companies must not downplay the significance of attaining racial justice and an equitable workplace. Any protected characteristic should not be viewed as a 'difference' or a 'disadvantage', but as a key driver of diversity, which creates healthy, challenging differences of opinion, critical for greater creativity, innovation, problem-solving and team performance.

In this regard, a diverse organisation is an investment in itself, a place where community is born of respect and understanding for each other. Companies that fundamentally place racial equity at the centre of their operating principles, and not at the periphery, are deserving of the success their investment brings.

Corporate social obligations? See how companies are performing via KnowESG's Company ESG Profiles. Compare by sector or direct search and see ESG scores across three major ratings providers.

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