Equity, Diversity and Inclusion: A Business Imperative for Long-Term Growth

In recent years, Environmental, Social, and Governance (ESG) performance has become a strategic priority for organizations, driven by increasing pressure from investors, regulators, consumers, and other stakeholders. Investors are incorporating ESG factors into their decision-making, as evidenced by over 5,000 investors managing approximately USD 121.3 trillion in assets signing the “Principles for Responsible Investment” by March 2022 (PRI, 2022). Regulators are also paying attention to issues of diversity and transparency in corporate governance. For instance,  in 2022, the European Parliament approved rules that at least 40% of the non-executive director positions must be held by underrepresented genders by 2026 (European Parliament,  2022). The same, for instance, the UK’s Financial Conduct Authority has a rule that publicly listed  companies must have at least one board member from an ethnic minority background and one woman in a senior board  position (FCA, 2022).

As a result, movements such as Black Lives Matter and global LGBTQ+ advocacy campaigns have further intensified  the focus on Equity, Diversity and Inclusion (EDI) in the workplace (World Economic  Forum, 2024). More and more investors, corporate leaders, and regulators are calling for more  disclosure of EDI initiatives and their impact on the performance of businesses. Inclusion is now considered as  one of the important drivers of workplace effectiveness that helps in creating a workplace where employees have a voice and  are enabled to give their best to the organization, which in turn improves the efficiency of the workplace  (Roberson, 2006; Nishii, 2013).

However, exclusion is still  a problem, which makes people who feel excluded to disconnect from their organizations (Mor Barak,  2015). Social exclusion theory posits that it decreases cooperation (Baumeister et al.,  2005) and has adverse emotional and psychological consequences (Blackhart et al.,  2009).

Although EDI is becoming more widespread, it is not easy to measure the effect of EDI due to the problems of self-reporting and the constraints of cross-sectional survey data. Instead, Teresa Almeida, a Research Officer in Behavioral Science at the London School of Economics and her colleagues reviewed more than 3.2 million employee reviews from Glassdoor from 2015 to 2022. Their study investigated the relationship between EDI and firm value over time across 945 publicly listed companies in the US and UK. The findings showed that EDI is beneficial for long-term market returns and especially so for growth-oriented firms. However, no effect was found on short-term market performance (Almeida et al., 2024).

Moreover, the study produced ambiguous outcomes with respect to the effects of EDI on accounting performance but revealed a positive association between EDI and innovation. The research further reveals that the benefits of EDI on long-term market performance and innovation are more pronounced in firms with more ethnic diversity at the executive level. In the end, the results of the study support the idea that EDI is either neutral or beneficial to firm performance, which supports the idea that diversity and inclusion are bad for business.

References

• PRI (2022). Principles of responsible investment (PRI) - 2021-22 ANNUAL REPORT. [online] Available at:

• https://dwtyzx6upklss.cloudfront.net/Uploads/b/f/m/pri_annual_report_2022_689047.pdf

• FCA (2022). Diversity and inclusion on company boards and executive management.

• World Economic Forum (2024). Global Parity Alliance: Diversity, Equity and Inclusion Lighthouses 2023.

• Roberson, Q.M. (2006). Disentangling the meanings of diversity and inclusion in organizations. Group & Organization Management, 31(2), pp.212–236. doi:https://doi.org/10.1177/1059601104273064.

• Nishii, L.H. (2013). The Benefits of Climate for Inclusion for Gender-Diverse Groups. Academy of Management Journal, 56(6), pp.1754–1774.

• Mor Barak, M.E. (2015). Inclusion is the Key to Diversity Management, but What is Inclusion? Human Service Organizations Management, Leadership & Governance, [online] 39(2), pp.83–88. doi:https://doi.org/10.1080/23303131.2015.1035599.

• Baumeister, R.F., DeWall, C.N., Ciarocco, N.J. and Twenge, J.M. (2005). Social exclusion impairs self-regulation. Journal of Personality and Social Psychology, 88(4), pp.589–604. doi:https://doi.org/10.1037/0022-3514.88.4.589.

• Blackhart, G.C., Nelson, B.C., Knowles, M.L. and Baumeister, R.F. (2009). Rejection Elicits Emotional Reactions but Neither Causes Immediate Distress nor Lowers Self-Esteem: A Meta-Analytic Review of 192 Studies on Social Exclusion. Personality and Social Psychology Review, 13(4), pp.269–309. doi:https://doi.org/10.1177/1088868309346065

• Almeida, T., Dayan, Y., Krause, H., Lordan, G. and Theodoulou, A. (2024). Diversity, Equity and Inclusion is not bad for business: Evidence from employee review data for companies listed in the UK and the US. The London School of Economics and Political Science, The Growth and Governance Hub.