Diversity: a social and regulatory concern

Social considerations fall within the broad panoply of sustainable finance and one aspect - diversity - is attracting increasing regulatory attention.

Regulators are increasingly recognising that good diversity and inclusion (D&I) practices help to reduce risk for regulated firms by ameliorating “groupthink” and are calling out pay gaps.

Official statistics are telling. Financial services were among Europe's worst industries on gender pay gaps in 2018, according to Eurostat. The February 2020 benchmarking report by the European Banking Authority (EBA) found that, based on September 2018 data, over 40 percent of institutions had still not adopted a diversity policy and two-thirds of boards were composed only of men. In July 2020, the Central Bank of Ireland's (CBI's) thematic assessment (PDF 1 MB) in the insurance sector noted slow progress in insurers recognising the importance of D&I and, even among firms with a D&I strategy, a “striking” disconnect between firms' policies and senior level decisions.

Such figures are no longer acceptable. Regulators expect firms to act now and deliver improvements and greater transparency. Disclosure of D&I policies or reporting of pay information is mainly voluntary, but regulation has been introduced in a small and growing number of jurisdictions. And the recovery phase of the pandemic is likely to raise additional equality and potential discrimination issues. As firms re-introduce office working, they need to consider the individual needs of their workforce and accommodate gender and ethnic specificities.

There has been some progress within the industry on D&I policies. For example, a poll conducted by the UK Investment Association among 24 firms found that 87 percent had established dedicated diversity networks to support employees and drive change, and 96 percent ran training programmes to educate their workforce on D&I-related issues, such as understanding racial bias, micro-aggressions in the workplace and everyday racism. The association noted, however, that collecting data on the protected characteristics of a firm's workforce, including employees' ethnicity, has been one of the most common and difficult challenges faced by firms. Legal, data protection and issues of trust are obstacles to full disclosure.

Back in 2018, the Central Bank of Ireland (CBI) warned that it would impose gender diversity requirements if improvements were not made. Sharon Donnery, Deputy Governor said gender balance can help ameliorate issues such as “groupthink, insufficient challenge, poorly assessed risk and problems with culture”, which, she said, contributed to the 2008 financial crisis. Senior CBI officials continue to highlight the importance of D&I to the culture and resilience of financial services firms.

In June 2019, the UK Financial Conduct Authority (FCA) indicated that it expected to see sufficient diversity in a regulated firm's leadership team. D&I is a central consideration of the FCA in all aspects of conduct, including towards different types of customers. In March 2021, FCA CEO, Nikhil Rathi said that diversity will be crucial in the FCA's consideration of vulnerability, particularly as we recover from a pandemic that has disproportionately affected women and people of colour. The FCA, which is working with the Prudential Regulation Authority on a joint approach to D&I for all financial services firms, will increasingly ask “tough” questions of firms about representation across grades, and whether their culture is open and inclusive and provides a safe space for colleagues at all levels.

The European Central bank (ECB) is expected soon to publish a revised Handbook, enabling banks to gain a better understanding of what is expected, before they make senior appointments. The ECB will also seek to harmonise national approaches to “fit and proper” assessments.

The Commission's five-year Gender Equality Strategy also includes the introduction of binding measures on improving the gender balance on corporate boards, including of financial services firms. Such measures already exist in a few member states. In France, for example, the obligation for boards to have at least 40 percent female members was extended in January 2020 from listed companies to companies with at least 250 employees and sanctions were strengthened.

To tackle gender and ethnic pay gaps, the Commission has issued a draft directive (PDF 560 KB) on equal pay for equal work, with transparency and enforcement provisions. The EBA is also on the case. In December 2020, it consulted on new remuneration guidelines for certain firms subject to the new Investment Firms Directive, which requires firms to apply a gender-neutral remuneration policy to all staff. The European Banking Authority (EBA) stated that “Any form of discrimination, based on gender or otherwise cannot be tolerated”. It defines gender-neutral remuneration policies as being “consistent with the principle of equal pay for male, female and diverse workers for equal work or work of equal value”. The final guidelines will not be legally binding, but supervisors will have to apply them or explain why not.

Issues of pay inequality, the diversity and wellbeing of staff, career development and training, and links between remuneration and sustainability risks may be challenging for traditional remuneration committees. Firms will need to undertake a fundamental review of the terms of reference, skill sets and composition of their remuneration committees.

Initial work has begun on extending the Taxonomy Regulation to define socially-sustainable activities. Existing EU regulation already includes pointers to what that definition might include regarding D&I. The Sustainable Finance Disclosures Regulation refers to investments that contribute to tackling inequality, and the Social Entrepreneurship Funds Regulation refers to the re-integration of marginalised groups into the labour market by providing employment, training or other support.

Like the industry, some progress has been made by regulatory bodies, but there is still a long way to go. There have been high-profile female appointments at the ECB, the Basel Committee on Banking Supervision, the US Federal Reserve Bank and others, and there are drives to improve the overall percentage of women and BAME staff of regulators. For example, the European Insurance and Occupational Pensions Authority now has almost an equal split between staff identifying as female or male. In May 2020, the ECB announced an aim of filling “at least half of new and open positions with women on all levels” and its March 2021 D&I policy says, “There is no place for racism at the ECB, in the EU or anywhere else”. The FCA has published an ethnicity action plan and gender and ethnicity pay gaps.