- DEI is increasingly recognized as a material ESG topic, including in the technology sector.
- Our engagement discussions with tech companies explored their efforts to address DEI.
- While progress is being made, results are mixed, and challenges persist.
Diversity, equity and inclusion (DEI) is considered an important element of human capital management (HCM); one made more pressing by demographic changes and heightened societal awareness. The Me Too and Black Lives Matter movements, coupled with evolving societal momentum regarding sexual orientation and gender identity have further highlighted concerns for both employees and investors.
Whether company leaders are genuinely enlightened or are fearful of being left behind as society evolves, DEI is increasingly recognized as a material environmental, social and governance (ESG) issue. Investor pressure continues to rise around DEI issues; as evidence, Diversity and Racial Justice is the most common topic for 2021 proxy resolutions, per the preliminary 2021 ICCR Proxy Resolution and Voting Guide.1
In our view, HCM and DEI can be material risks to organizational and investment performance. Issuers that effectively address those risks may be more sustainable and, as a consequence, represent lower potential investment risk. As part of our ongoing thematic engagement program, Breckinridge discussed DEI with selected high-tech firms during the first quarter of 2021. Key takeaways are summarized in this article.
Defining the Terms Diversity, Equity, Inclusion… Along With Belonging and Justice
Many acronyms relate to diversity, equity and inclusion as society’s understanding of pertinent issues evolves. Among them are DEI, D&I, DIB (Diversity, Inclusion, Belonging) and JEDI (Justice, Equity. Diversity, Inclusion), to name several common acronyms. For our work we have chosen DEI, but it is worth exploring some of the terms more closely.
A blog by Seth Boden, published on harvardbusiness.org in July of 2020 summarized some of the relevant terms this way:
- “Diversity refers to anything that sets one individual apart from another.”
- “The ‘E’ in DEI stands for equity—fair treatment for all, while striving to identify and eliminate inequities and barriers …” “Equity is different than equality.”
- “Inclusion implies a cultural and environmental feeling of belonging and sense of uniqueness. It represents the extent to which employees feel valued, respected, encouraged to fully participate, and able to be their authentic selves.”
- “The ‘B’ in DIB adds the word belonging into the conversation—the experience of being treated and feeling like a full member of a larger community …”.
The Venn diagram illustrates “Belonging” at the nexus of Diversity, Equity, and Inclusion. By creating a culture of belonging, an organization can best position itself to attract, develop and retain the highest quality employees.
The term, “JEDI” adds the concept of Justice to DEI, whereby individuals are focused on doing what is right for an extended pool of stakeholders. B-Lab utilizes JEDI as its guiding principle and calls on B-Corps, like Breckinridge, to action by saying: “Let’s call racism and privilege by its name, stop making oppression only about race, and dismantle white supremacist ideologies that govern our existence.”3 This philosophy is aligned with our emphasis on the importance of broad stakeholder analysis.
How We Integrate DEI Factors into Security Analysis
Breckinridge integrates DEI considerations into research based on its materiality to a sector and the availability of DEI-related metrics. Research from the Sustainability Accounting Standards Board (SASB) and others shows that HCM and DEI are most relevant for companies with large workforces or where intellectual capital can provide a competitive advantage.
For sectors where Breckinridge has deemed DEI to be a material consideration from credit and ESG perspectives, analysts review corporate disclosures and engage with companies on these issues to review disclosures and performance. At present, we view DEI to be most relevant within technology, financials, and retail/restaurants.
In our engagement discussions with several well-known large technology firms, Breckinridge focused on these critical components:
A - Representation: We focused this thematic engagement on the technology sector because, generally, the sector has shown under-representation of women and BIPOC individuals at all levels, and especially among executives. According to the U.S. Equal Employment Opportunity Commission, African Americans, Hispanics and women are under-represented in the high-tech sector relative to private industry overall:4
Through the context of our engagement, we found mixed results when it comes to disclosure trends with disaggregated data and explicit goals for improvement in terms of representation:5
Our key takeaways regarding these representation trends are summarized below:
- Most companies we spoke with disclose current workforce composition in terms of gender (global) and ethnicity/race (U.S.-only). Racial metrics are often disclosed in the context of U.S.-only operations, rather than global, because there are varying definitions of what constitutes an ethnic minority in areas outside of the U.S. Furthermore, even within the U.S., there are slight variations in how companies define the term minority, with distinctions between ethnicity and race.
- Approximately two-thirds of the companies we spoke with disclose the year-over-year change in representation based on gender and/or race. Understanding the change is helpful to analysis, although it cannot replace disclosure of current composition metrics because percent-of-change data can sometimes obscure a low base of representation rather than an inflection point of change.
- Approximately one-third of companies surveyed break out representation metrics by technical roles; the reason for analyzing this information is to ensure that administrative and non-technical roles are not stacked with underrepresented groups simply to boost numbers. That said, some challenges persist with the measurement and disclosure of representation within technical roles because definitions and context display significant variation. For example, a store associate at a consumer hardware company and an engineer with a master’s degree at a semiconductor chipmaker are both considered technical employees, despite substantially different backgrounds. To combat this challenge, there are initiatives underway such as the Global Inclusion Index, which is an effort to standardize diversity-related measures to draw more informed conclusions.6
- Half of the companies we spoke with have explicit goals to improve representation of either race/ethnicity and/or gender, which signals a willingness to be accountable regarding an improvement of representation. A best practice is when companies set clear benchmarks and a timeline regarding representation of women and BIPOC individuals; these goals can be even more powerful if manager compensation is tied to them.
B - Talent Acquisition: Widening the pool of qualified Science, Technology, Engineering and Mathematics (STEM) candidates is both a key goal and an ongoing challenge. As an example, many companies work with community partnerships to create internship opportunities which provide valuable skills and create a richer recruitment pipeline. Several companies reported targeted recruitment efforts such as engaging with Historically Black Colleges and Universities (HBCU) and one emphasized its support of the OneTen Initiative which seeks to create one million tech jobs for Black Americans within 10 years.
A couple of firms we spoke with demonstrated a high degree of seriousness in managing bias in conducting job candidate interviews. Initiatives are underway to analyze the diverse talent market and to adjust searches, targeting diverse candidates for specific jobs and levels of experience. Elsewhere, bias recognition processes are in place to scrub job-posting language and reduce inherent bias.
C - Turnover: Employee turnover and loss of intellectual capital is a key concern in a high-skilled sector like technology. Through smart use of data, companies can better track and analyze DEI performance; some companies take this a step further and integrate DEI principles into the performance measurement process.
In the end, efforts to create a greater degree of inclusion may correlate to improved employee retention.
A - Compensation Practices: One area where tangible progress appears to have been made is in creating more equitable pay practices. One indication of a company’s level of commitment to equity is the application of pay equity practices; gender pay equity is generally compliance-driven, while racial or ethnic pay equity initiatives are proactively driven, indicating a higher level of commitment.
We specifically questioned companies about their methods of determining equal pay for equal work. As expected, most companies accounted for variability in region, role and experience to determine equal work. The area in which we found the largest variability was in how companies defined equal pay: some used only salary, others used salary plus bonus, and the best programs accounted for salary/bonus/stock compensation and other benefits.
B – Executive Leadership: In our observation, most companies have a senior professional dedicated to promoting DEI. One key distinction is whether that position is elevated to the C-suite in the role of Chief Diversity Officer or Chief People Officer. An indicator of less commitment is if the role is integrated with another function rather than being a dedicated role.
C - Board Oversight: We observed that boards of directors are increasingly involved in DEI and companies perceived to have the deepest authenticity integrate DEI practices into overall corporate strategy. We remain curious as to whether there is a correlation between improved diversity on a company’s board and the board’s degree of oversight of diversity.
A - Employee Engagement: Employee resource groups (a.k.a. affinity groups) appear to be a standard practice across large companies in the sector. Even as a first step, resource groups can make members of under-represented groups feel more connected and engaged. More actively, employee engagement surveys appear to be effective when a company incorporates feedback into the development of its corporate culture; one firm reported that employees who are surveyed are up to 5.7 times more likely to stay with the company.
B - Training: We found an increased focus on unconscious bias training, also known as conscious inclusion at some companies, which may improve the welcoming nature of a culture and thus, career development prospects for members of under-represented groups.
C – LGBTQ+ and Disability Inclusion: While our engagement did not specifically focus on inclusion of LGBTQ+ individuals or persons with disabilities, we found that companies in this sector were well-regarded as welcoming to persons with disabilities or who identify as LGBTQ+. Note that technology companies included in these metrics may not be representative of the sector as a whole.
- 100 percent of companies we engaged with were cited on the Human Rights Campaign Corporate Equality Index 2021 List of "Best Places to Work for LGBTQ Equality"7
- 75 percent of companies we engaged with were included in the 2020 List of "Best Places to Work for Disability Inclusion"8
Encouraging Signs of Progress on the Horizon
Is the glass half empty or half full? Perhaps both at the same time. There is always more progress to be made, and the tech industry has deservedly received criticism for its lack of progress in workforce diversity.
Despite existing and new challenges on the horizon, technology companies are well positioned to leverage their data capabilities to dynamically adapt to market trends and proactively address human capital concerns. Additionally, based on our engagement discussions and ESG research, technology companies are making progress on representation, to varying degrees.
We continue to monitor efforts at improving DEI in the technology industry and the ways in which it spills over into other industries, especially those where DEI has a material influence on a company’s overall human capital management. Finally, we remain curious about the longitudinal trends of how companies will continue responding to societal changes, competitive risks, and best business practices to create a culture of belonging, a society of justice, and uphold the principles of diversity equity, and inclusion.
 Source: ICCR Proxy Resolution and Voting Guide report released February 26, 2021
 Original source for the Venn Diagram is available here: Original source for the Venn Diagram is available here: https://www.aug.co/blog/belonging-a-conversation-about-equity-diversity-and-inclusion
 Source: B-Lab Anti-Racism Business Resources: Commit and Act; Examples and Steps to Drive Real Change [November 2020]. B-Lab is a non-profit organization that issues certifications to for-profit organizations that meet specific standards of performance, public transparency, sustainability, and accountability. Organizations that meet the standards are awarded with the certified B Corp designation.
 Source: https://www.eeoc.gov/special-report/diversity-high-tech
 Source: Breckinridge Capital Advisors. The data in this table was assembled following a series of thematic engagement discussions focusing on DEI held by analysts at Breckinridge with representatives of 8 investment grade technology sector companies that issue bonds. The conversations, which took place in 2020 and 2021, included detailed reviews of statistics related to gender or racial workforce composition, or both, and in certain instances to LGBTQ+/disability inclusion, among other relevant issues.
 Intel Investor Relations Filings. https://newsroom.intel.com/editorials/we-must-collaborate-not-compete-diversity/ ; https://www.zdnet.com/article/intel-challenges-tech-industry-to-create-global-inclusion-index-to-measure-diversity/
This material provides general and/or educational information and should not be construed as a solicitation or offer of Breckinridge services or products or as legal, tax or investment advice. The content is current as of the time of writing or as designated within the material. All information, including the opinions and views of Breckinridge, is subject to change without notice.
Any estimates, targets, and projections are based on Breckinridge research, analysis, and assumptions. No assurances can be made that any such estimate, target or projection will be accurate; actual results may differ substantially.
Past performance is not a guarantee of future results. Breckinridge makes no assurances, warranties or representations that any strategies described herein will meet their investment objectives or incur any profits. Any index results shown are for illustrative purposes and do not represent the performance of any specific investment. Indices are unmanaged and investors cannot directly invest in them. They do not reflect any management, custody, transaction or other expenses, and generally assume reinvestment of dividends, income and capital gains. Performance of indices may be more or less volatile than any investment strategy.
Performance results for Breckinridge’s investment strategies include the reinvestment of interest and any other earnings, but do not reflect any brokerage or trading costs a client would have paid. Results may not reflect the impact that any material market or economic factors would have had on the accounts during the time period. Due to differences in client restrictions, objectives, cash flows, and other such factors, individual client account performance may differ substantially from the performance presented.
All investments involve risk, including loss of principal. Diversification cannot assure a profit or protect against loss. Fixed income investments have varying degrees of credit risk, interest rate risk, default risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. Income from municipal bonds can be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the IRS or state tax authorities, or noncompliant conduct of a bond issuer.
Breckinridge believes that the assessment of ESG risks, including those associated with climate change, can improve overall risk analysis. When integrating ESG analysis with traditional financial analysis, Breckinridge’s investment team will consider ESG factors but may conclude that other attributes outweigh the ESG considerations when making investment decisions.
There is no guarantee that integrating ESG analysis will improve risk-adjusted returns, lower portfolio volatility over any specific time period, or outperform the broader market or other strategies that do not utilize ESG analysis when selecting investments. The consideration of ESG factors may limit investment opportunities available to a portfolio. In addition, ESG data often lacks standardization, consistency and transparency and for certain companies such data may not be available, complete or accurate.
Breckinridge’s ESG analysis is based on third party data and Breckinridge analysts’ internal analysis. Analysts will review a variety of sources such as corporate sustainability reports, data subscriptions, and research reports to obtain available metrics for internally developed ESG frameworks. Qualitative ESG information is obtained from corporate sustainability reports, engagement discussion with corporate management teams, among others. A high sustainability rating does not mean it will be included in a portfolio, nor does it mean that a bond will provide profits or avoid losses.
Net Zero alignment and classifications are defined by Breckinridge and are subjective in nature. Although our classification methodology is informed by the Net Zero Investment Framework Implementation Guide as outlined by the Institutional Investors Group on Climate Change, it may not align with the methodology or definition used by other companies or advisors. Breckinridge is a member of the Partnership for Carbon Accounting Financials and uses the financed emissions methodology to track, monitor and allocate emissions. These differences should be considered when comparing Net Zero application and strategies.
Targets and goals for Net Zero can change over time and could differ from individual client portfolios. Breckinridge will continue to invest in companies with exposure to fossil fuels; however, we may adjust our exposure to these types of investments based on net zero alignment and classifications over time.
Any specific securities mentioned are for illustrative and example only. They do not necessarily represent actual investments in any client portfolio.
The effectiveness of any tax management strategy is largely dependent on each client’s entire tax and investment profile, including investments made outside of Breckinridge’s advisory services. As such, there is a risk that the strategy used to reduce the tax liability of the client is not the most effective for every client. Breckinridge is not a tax advisor and does not provide personal tax advice. Investors should consult with their tax professionals regarding tax strategies and associated consequences.
Federal and local tax laws can change at any time. These changes can impact tax consequences for investors, who should consult with a tax professional before making any decisions.
The content may contain information taken from unaffiliated third-party sources. Breckinridge believes such information is reliable but does not guarantee its accuracy or completeness. Any third-party websites included in the content has been provided for reference only. Please see the Terms & Conditions page for third party licensing disclaimers.