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Why Does ESG Not Include Gender?

As global norms continue to evolve, the importance of gender diversity cannot be ignored. Is gender the new ESG?

Why Does ESG Not Include Gender?
POSTED ON October 04, 2023 11:48 AM

Over the years, responsible investing has gained ground in the investment community. Environmental, Social, and Governance (ESG) standards have been sparking a transformation in the way businesses operate.

These principles have emerged as a guiding light, fostering a more responsible and sustainable approach to business operations. Yet, there’s an elephant-sized gap that’s been overlooked--the glaring lack of attention given to gender-related factors within the ESG framework. 

ESG guidelines emphasise an organisation’s environmental impact, social responsibility and good governance. The United Nations' 2005 report introduced ESG with the aim of ensuring responsible investing but failed to give due attention to the significant role of gender diversity in influencing businesses and societies.

While the UN has made efforts to integrate a gender perspective into all its policies and programs through ECOSOC, 'gender' has not yet been fully incorporated into ESG principles. 

Historical Roots of Gender Omission 

The roots of gender omission within key governance frameworks can be traced back to history. Did you know the UN's Universal Declaration of Human Rights proclaimed, "All men are born free and equal," using a gender-exclusive term? This was despite having Eleanor Roosevelt, a woman, as the chairperson of the drafting committee. 

In the late 1940s, the exclusion of women from ‘equality’ rights became a pressing issue. Female delegates from various countries played a pivotal role in instigating this transformation, which resulted in the inclusion of women's rights in the Declaration. 

Hansa Mehta, of Indian origin, played a significant role in changing 'men' to the inclusive term 'human beings.' Article 1 of the UDHR now states, "All human beings are born free and equal," marking a significant stride toward gender inclusivity.

The most accepted set of ESG guidelines are the IFC Performance Standards, formalised in 2006. They represent the code that investors and companies sign up to as part of their commitment to sustainability.

It is not unusual to find people who assume that the 'G' in ESG stands for gender, and many think the 'S' encompasses gender considerations. But it is not as comprehensive as it seems.

'G' represents governance. The 'S' stands for social and is limited to gender-related issues that intersect with labour laws, such as maternity benefits. 

Recognising Gender Diversity 

In the last 15-odd years, ESG has gained strong acceptance. Today, investors prefer companies that have strong track records in environmental and social responsibility.

Private equity and venture capital funds are increasingly adhering to ESG best practices, and companies have become comfortable with integrating ESG considerations in business operations. But where do we stand on gender?

In 2008, IFC started tracking information separately for men and women in its Development Outcome Tracking System (DOTS). They also introduced a special marker for gender-related aspects in their advisory and investment services.

In recent years, leading pensions, institutional investors, and DFIs have started focusing on gender, inclusion, and gender-related matters. Multiple frameworks and initiatives have been launched to support investments in women-led funds and businesses, primarily by DFIs.

However, we are yet to see a specific requirement from investors asking for specific action on inclusion. This raises the question: Why isn't there more investor support for promoting gender inclusion? 

ESG And Gender 

As global norms continue to evolve, the importance of gender diversity cannot be ignored. Someone once said to me, Gender is the new ESG! Is it?

Then, let us have investors do diligence on gender-related matters, draw up corrective action plans, and monitor the completion of those plans. Let’s shift gender from being a mere checkbox to becoming one of the discussion points. The concepts that apply to ESG also apply to gender, such as being beneficial for business and leading to better long-term outcomes.

Similar to ESG, being inclusive will become a license to operate in the longer term, and very importantly, if a founder, promoter, or fund manager is resistant to the idea of inclusion, they might not be the partners that institutional investors are looking for. To simplify things, maybe we could update the ESG standards to specifically include gender and related considerations, steering the entire industry in the right direction. 

I hesitate, though. It has been almost two decades since the ESG performance standards were launched. We are still championing ESG principles and convincing fund managers to adopt them.

It is not unusual to find watered-down ESG requirements at play, especially when fund managers have shown commercial success. And we are fully aware of the phenomenon of greenwashing.

I recall this excellent learning discussion I had with one of my ex-colleagues who specialises in ESG. We were discussing a renewable energy business that checked all the obvious ESG boxes. On digging deeper, one realised that it would deplete groundwater in an area where groundwater was already at dangerously low levels. It was ESG compliance versus sustainability. 

Mainstreaming Gender 

I hesitate to advocate for gender diversity to follow the same path. Would it be okay if fund managers built portfolios with women co-founders but didn't have any women within their teams? Would it be okay if fund managers invested in 'women first' businesses that had all-male leadership teams? Or would it be okay if fund managers hired that one woman and then nothing else?

Clearly not.

That is not what we are looking to achieve. I believe gender diversity is more than a developmental agenda, a good-to-have, a positive deal marker on a deal sheet.

It is a culture change that acknowledges the talent and potential of a group that represents half of the population and half of the workforce across markets. It is a shift in mindset that creates an appreciation for diverse perspectives and diverse approaches.

Yes, it challenges and pushes people to come out of their comfort zones and work with people who look and sound like them. But ultimately, it is the best way to access the best minds and ideas. So let us up the game and get the best talent. 

- Nupur Garg, founder at Winpe 

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