Recently, the Securities and Exchange Commission Chair Gary Gensler announced on Twitter that the Commission is looking to crack down on ‘greenwashing’ amongst ESG-focused investment funds. While this action focuses on protecting investors and restoring their confidence in funds touting ESG-focused investment strategies, the same concerns also generally lie with companies proclaiming their newfound ESG focus with a ‘tick-the-box’ or ‘window dressing’ mentality.
Harvard Business School professor, George Serafeim, makes a compelling case for why companies need to act with positive intent and transparency regarding their ESG programs and not simply make superficial statements. This call by Professor Serafeim is all the more apropo as investors continue to demand more ESG disclosures from companies.
Reg S-K/Human Capital Disclosures
With this in mind, let’s take a look at the Russell 3000 group of companies and analyze what has been disclosed in their Human Capital section under Reg S-K regarding their diversity, equity, and inclusion policies.
Common themes demonstrating this commitment include increasing recruitment efforts, training and leadership development, and providing networking opportunities for underrepresented employee groups. For example, we used the idaciti ESG Accelerator to extract and structure disclosures of networking opportunities. We found approximately 23% and 24% of the Russell 3000 companies in 2020 and 2021, respectively, disclosed providing some form of networking opportunity - whether through employee resource groups or seminars/networking events - as part of their DEI initiatives.
Although nearly one-quarter of this group of companies make such disclosures, how many actually practice what they preach and back it up with a meaningful commitment?
Aligning Executive Interest to ESG Targets
Agency theory explains why, in practice, we observe executive compensation contracts being used as a mechanism to incentivize management to act in the interest of shareholders. This alignment of interests is especially critical since investors are now emphasizing ESG factors when making their investment decisions. In particular, investors are paying close attention to how companies have been treating their employees, especially during the unprecedented period in the past few years of the Covid-19 pandemic and sweeping changes in the social landscape as exhibited by the Black Lives Matter and Me Too movements. As a result, we were curious what percentage of the Russell 3000 companies linked executive compensation to DEI metrics? After all, once senior management’s performance-based compensations are tied explicitly to achieving DEI goals, the DEI corporate strategy moves beyond mere words to management buy-in and concrete action.
We used our ESG Accelerator platform to execute the search and structure the disclosures tying DEI goals and objectives to executive compensation. Our structuring covered Proxy Statements, 10-Ks, 10-Qs, and Earnings Releases of companies for the fiscal years 2020 and 2021 for the Russell 3000 group of companies. Note that the statistics for more recent fiscal year 2021 filings filed to the SEC are as of April 2022. During this 2020-2021 period, approximately 13.5% of the Russell 3000 group of companies mentioned linking executive or management compensation to DEI performance metrics. When we examined the data for the Fortune 500 companies, we found that nearly 30% of companies aligned the interests of management to DEI-specific goals.
Human in the Loop Machine Learning
The challenge in doing such research and extracting the data is due to the heterogeneous ways companies discuss executive compensation and the related metrics. Using a hybrid of supervised and unsupervised machine learning algorithms, the idaciti ESG Accelerator was able to surface, structure, and provide full traceback to the source locations for these disclosures in a matter of a few hours.
Since every disclosure has a one-click traceback to the source location, the analyst can quickly look at any of the results to further understand the surrounding context of the data. In addition, each structured disclosure returned by the platform has additional ‘confidence scores’ so analysts can quickly eliminate false positive or incorrect results.
In the past, such a research project may have taken weeks or even months for a team of analysts to use a more manual approach (i.e., control-find, reading through pages of disclosures, etc., to then copy and paste into a spreadsheet). We, at idaciti, simply don’t have this luxury. After all, collecting data like this is not our ‘day job’. Our day job is to continue to innovate on the ESG Accelerator platform and demonstrate its ability to empower subject-matter experts to seed the system and have the system collect, structure, and deliver this data at scale.
And…that is how we walk our talk.