It’s Time to Increase Investment in ESG’s Oft-Overlooked Middle Child

Prompted by various discussions during Women’s History Month in March, including a ‘Breaking down the ‘S’ in ESG’ panel discussion at Europe Corporate Banking Day, BwB’s Heather Matson , Isaac Caiger-Smith , and Alison Shaw have been reflecting on a piece of research we published in 2023 looking at the business case for investment in women and diversity.

The elusive ‘S’ factor

Even among the most ardent ESG proponents, the ‘S’ in ESG is generally acknowledged to pose significant challenges, with many investors viewing it as too difficult to measure and even harder to define, preferring instead to focus on the multitude of ‘E’-centred investment opportunities and the relative clarity of ‘G’-related considerations. 

Building on a great analogy offered by moderator Sandrine Markham during the ‘S’ in ESG panel discussion, if ESG is a family, then ‘E’ is the eager, over-achieving eldest child, ‘G’ is the grown-ups providing guidance, rules, and structure, and ‘S’ is the sidelined, ‘difficult’ middle child. Sandrine’s analogy drew a lot of laughs in the room, but also a lot of knowing looks – the sheer diversity and context-dependent nature of ‘S’-related factors resist easy categorisation and the establishment of universal standards that offer meaningful ways to compare performance.

Providing proof of concept

Nevertheless, focused work to design relevant KPIs and robust reporting processes can go some considerable way towards overcoming the challenges of anchoring the specific social indicators of an organisation or initiative to measurable outcomes. The key is to focus on the demonstrable business case and impact-centred rationale rather than abstract notions of ‘doing the right thing’. Evidence of the real-world benefits of investing in women and diversity is abundant and compelling. To give just a few examples: 

• Organisations in the top quartile for both gender and ethnic diversity are 39% more likely to outperform their less diverse counterparts in profitability. 

• Companies with three or more female board members demonstrate higher return on equity. 

• Having more women in the C-suite correlates with higher profitability.  (Also see here.) 

• Companies with above-average diversity on their management teams report innovation revenue that is 19 percentage points higher than those with below-average diversity. 

The need for financial innovation

The data underscores the potential of investing in women and diversity as a strategic performance accelerator, yet ‘S’ remains underserved by financial innovation. The challenge for the financial industry therefore is to create new instruments – sustainability linked-loans tied to equity metrics, gender-lens investment funds, there are endless opportunities for financial institutions to expand and thrive in this space. These resources from the European Investment Bank, the International Institute for Sustainable Development, and Parallelle Finance provide useful additional information about gender-lens financial instruments and initiatives. 

Turning criticism into catalyst 

Recent pushback on ESG in general, and ‘S’ in particular, in certain circles, should not be viewed as the beginning of the end, but as a call and opportunity to reimagine existing models and apply more creativity. By viewing criticism as a stress test, we can innovate and iterate on more impactful, more robust financial structures and metrics to demonstrate that, far from being a trade-off, investing in gender and diversity can be a high-performance multiplier. 

It’s time to stop treating ‘S’ as the difficult middle child and put some more work into understanding its unique strengths as a significant force for generating positive change and additional value. 

If you’re working on an innovative financing or investment structure focused on ‘S’ issues, or developing a new framework or methodology to make the measurement of ‘S’ factors more insightful, we’d love to hear from you in the comments below, or by e-mail: contact@bwb.earth. 

Read BwB’s 2023 report on gender and investment here.