Harnessing Big Data to Identify Financially Material DEI Metrics
Over the last few years, interest in diversity, equity and inclusion (DEI) has gained a front-row seat in sustainability-related topics. Investors and companies have come to understand the importance of having robust DEI frameworks to attract and retain the best talent, combat discrimination and harassment, and improve productivity and retention. As such, companies and investors are understanding the financial materiality of DEI.
In 2019, Rights CoLab started working on different outputs to assist in guiding the conversation of potential sources and indicators of financial risk related to DEI. In late 2019, Rights CoLab and the Value Reporting Foundation (VRF) formed a knowledge partnership in the form of a MOU, which continued until VRF’s merger into the International Sustainability Standards Board (ISSB) in August 2022. The purpose of this knowledge partnership was to assist SASB’s Board work in addressing Human Capital in SASB’s standards and prioritizing DEI into the Human Capital standards. The revision of the human capital standards entailed developing data science models that can surface evidence of the financial materiality of human capital topics by industry to support the VRF’s efforts to update the SASB standards.
As part of the knowledge partnership with VRF, Rights CoLab worked with the SASB Standards research staff and the Data for Good Scholars (DfG) Program of Columbia University’s Data Science Institute to inform the revision of ISSB’s human capital standards, under our Human Capital Data Science Project. Rights CoLab and the DfG team created a data science methodology with two workstreams: (i) the Extension Project to expand on the topics covered by SASB’s standards to new sectors; not covered by SASB; and (ii) the Addition Project to identify new relationships between labor rights metrics and SASB criteria for financial materiality within a broad range of SASB industry standards.
This Report on Financially Material DEI Metrics documents a three-year effort to apply our data science methods to advance standard-setting for DEI for the identification and analysis of emerging evidence of financially material DEI topics. In applying the data science methods, the Report informs the Extension Project (i.e., “finding supportive evidence for extending DEI metrics to industry standards that do not currently contain them”) and Addition Project (i.e., “for defining new metrics for human rights-related business risks”).
As a starting point, we created a term dictionary based on the SASB Human Capital research team’s Diversity, Equity & Inclusion Proposal Approach and our report What Is DEI: Market Signals of Diversity Equity and Inclusion, where we mapped and analyzed 429 metrics used by 21 influential DEI organizations identifies areas of market consensus, divergence, and potential gaps in the metrics and is
framed as a firm foundation for a productive conversation on DEI goals and how to measure its performance. Then we built a text processing pipeline and chose data sets that we ran through the pipeline and analyzed the algorithm results (a detailed description of the Methodology is available in the Report).
Following our methodology, this Report focuses on three DEI topics: gender pay gaps, hiring or termination of marginalized groups, formerly incarcerated workers and older workers. In this way, we found evidence of the financial materiality of all three, which supports consideration of the inclusion of related DEI metrics in financially material standards.
This report responds to market demand for a better understanding of the financial risks and opportunities related to diversity in the workforce and sets a solid basis for the understanding of DEI within Human Capital-related topics.