Diversity, inequality metrics will see 'a lot of scrutiny' next year as ESG investing grows, MSCI says

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Diversity will be top of mind for investors in the year ahead, says a leading MSCI researcher.

The Nasdaq’s recent proposal to require more diversity on boards of companies listed on the exchange is just one example of a sustained push that is likely to strengthen, Linda-Eling Lee, global head of research for MSCI’s ESG Research group, told CNBC’s “ETF Edge” on Monday.

“Oddly, the progress actually has been extremely slow even though we’ve already seen this kind of push for several years,” Lee said.

This year, MSCI’s annual Women on Boards report showed a notable “slowdown in the rate of increase for female representation on boards with a gain of only 0.6 percentage points among constituents of the MSCI ACWI index,” the firm’s flagship global equity index, Lee said.

“If you take this kind of trend of progress over the past four years and you project it forward, it’s going to take until, like, 2029 for women to comprise 30% of corporate boards,” she said.

As such, the Nadsaq’s move and support from larger institutional investors can help to accelerate progress on this front, Lee said.

“I definitely think that this is an area that will continue to get a lot of scrutiny,” she said.

The relatively limited set of U.S. exchange-traded funds tracking diversity includes the Impact Shares NAACP Minority Empowerment ETF (NACP), the Impact Shares YWCA Women’s Empowerment ETF (WOMN) and the SPDR SSGA Gender Diversity Index ETF (SHE).

Inequality more broadly will also be a major focus following the economic hardship wrought by the Covid-19 pandemic, Lee said.

“Covid has had this effect of really shining a light on the health and the economic disparities in our society,” she said. “We expect that the incoming administration’s focus on economic inclusion and on social issues is going to mean that companies should not really take their social license to operate for granted.”

That accounts for metrics such as how companies treat their employees, how diverse their workforces are, whether they have a tendency to “prey” on their customers or suppliers and if they create value that ends up being “shared across stakeholders,” she said.

“We think that this is really actually going to amplify and intensify over the coming years,” Lee said. “In response, what we’re seeing is that companies are going to get more creative about how they can actually better beef up their social credentials with investors in the public and maybe actually get out of the crosshairs of policymakers.”

That could spur growth in new forms of financing such as social impact bonds, sustainability bonds or share issuances tied to companies’ sustainability goals, Lee said.

“These are ways that companies are taking to make a more direct link between its business and the social value that it brings more broadly,” she said.

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