The Role of Diversity in ESRS and its Benefits for Companies

ESRS, talk | 23. June 2023
Lea Müller
Sustainability Specialist Code Gaia

The term diversity is on everyone’s mind, especially in June, since it is Pride Month. The month is dedicated to celebrating, recognizing and supporting the LGBTQI+ community. With events, parades, demonstrations, cultural activities and educational campaigns, the visibility and acceptance of lesbian, gay, bisexual, transgender and queer people is promoted. In recent years, more and more companies are celebrating Pride Month and transforming social media into a more colorful place with their pride logos.

For many companies, however, the approaching sustainability reporting requirements will be about more than rainbow logos. That’s because the ESRS (European Sustainability Reporting Standards), which form the framework for compliance with the CSRD (Corporate Sustainability Reporting Directive), mention diversity several times, especially in the social and governance context.

Sexual orientation and identity, which is only one dimension of diversity, is of course not covered by the disclosure requirement. Why raising awareness here is nevertheless worthwhile for teams and companies and to what extent it can play a role in the ESRS and thus in the sustainability report will be a topic later. First, we want to find out what is behind this concept and what other dimensions of diversity there are.

What does Diversity mean?

Diversity describes the recognition and appreciation of diversity among human beings. This concept, which is relevant both organizationally and sociopolitically, advocates respectful treatment of differences and people’s individuality. It aims to reduce discrimination and promote equal opportunities and a diverse and heterogeneous society.

Diversity refers to visible and invisible characteristics of each person and can be divided into different dimensions. These include, for example, gender, social and cultural origin, age, sexual orientation, marital status, and physical and mental condition. (Source: https://www.lpb-bw.de/diversity#c70919)

In the work environment, diversity means avoiding disadvantages in companies and using the diversity of employees as an opportunity for the company’s success. This approach is referred to as “diversity management.”

Diversity refers to the representation of women and/or ethnic groups or minorities in one’s own workforce, the age distribution within one’s own workforce and the percentage of persons with disabilities in one’s own workforce.

Why does Diversity matter in a Company?

There are good reasons why companies should engage in diversity management, because it has a very concrete impact on their well-being. To return to Pride Month – those who also work behind the rainbow logo on concrete measures to implement all dimensions of diversity (let’s recall: gender, social and cultural origin, age, sexual orientation, marital status, physical and mental condition) not only do their (potential) employees a favor, but also benefit substantively and financially.

Below are some of the benefits of good diversity management, taken from the McKinsey&Company study and the Diversity Recruiting Report by Indeed and the ifo Institute:

Increased Profitability through Diversity

♂ ♀ Gender parity: Companies with more gender diversity in leadership teams were 21% more likely to perform better on profitability and 27% more likely to have superior value creation. The companies that performed top on both profitability and diversity had more women in senior (typically revenue-generating) positions than in staff positions on their leadership teams.

🌈 Cultural/ethnic diversity: companies with higher ethnic/cultural diversity on leadership teams were 33% more likely to achieve industry-leading profitability. Therefore, the inclusion of diverse individuals – and in all their facets beyond gender (e.g., LGBTQI+, age/generation, international experience) – can be an important differentiator between organizations.

📉 Disadvantage of little diversity: Companies with little or no gender and ethnic/cultural diversity were 29% less likely to have above-average profitability compared to all other companies in the study data set.

Diversity as the key in the Competition for Talent

💫 Attracting talent: A diverse workplace attracts diverse talent, as people of different backgrounds, experiences, and skills are drawn to diversity. Companies thus have access to a broader talent pool.

🤝 Employee retention: An inclusive workplace that values diversity creates a sense of belonging and motivation among employees. This helps ensure that they stay with the company for the long term and continuously develop their skills.

Increased Productivity through Diversity

🎨 Creativity and innovation: Diversity promotes the exchange of different ideas, perspectives and ways of thinking. The clash of different views gives rise to innovative approaches to solutions and creative ideas that can drive the company forward.

👁️‍🗨️ Improved decision-making: In diverse teams, decisions are made based on different perspectives and experiences. As a result, potential blind spots are minimized and more informed decisions are made.

🚀 Higher productivity: An inclusive workplace that promotes the involvement of all employees creates a positive working environment. Employees feel valued and are more motivated to give their best, which has a positive impact on productivity.

💚 Customer orientation: The customer base is becoming increasingly diverse. A diverse work environment enables companies to better understand their customers, identify their needs and preferences, and thus offer more effective solutions and products. It also makes it easier to tap into new market segments.

🧠 More effective problem solving: Diverse teams bring in different perspectives and approaches to solutions. By sharing different ideas and approaches, complex problems can be better analyzed and solved.

Improving Reputation through Diversity

🌟 Corporate reputation: Companies that promote diversity and inclusion are perceived as progressive, open and inclusive. This contributes to a positive corporate image and a good reputation, which is attractive to both customers and potential employees.

👐 Support for social responsibility: A company that promotes diversity and integration contributes to the creation of an inclusive society. It demonstrates social responsibility and contributes to equality and equal opportunities in the work environment.

Promoting Diversity: Examples & Measures

Good diversity management brings immense benefits. But how can you promote diversity in your own company to not only have a positive impact on your employees and profitability, but also to operate in accordance with ESRS (European Sustainability Reporting Standards)? Here are some examples of measures that can help in this endeavor:

🌈 Strategy: develop a policy for inclusion that focuses on ethnic diversity or minority groups. This policy should include a clear commitment to diversity and affirmative action.

👩‍🏫 Training: conduct diversity and inclusion training that includes ethnic considerations. These trainings should be offered to all employees to raise awareness of diversity and promote an inclusive corporate culture.

🤝 Targeted recruitment: Active efforts to target recruitment of underrepresented groups. This can be achieved by seeking candidates in specific networks or organizations that focus on promoting diversity

🎯 Targets: Setting specific targets to increase the proportion of underrepresented groups in the company’s own workforce and in top management. These targets should be reviewed regularly and communicated transparently to track progress and ensure accountability.

Diversity in the European Sustainability Reporting Standards

Diversity in the company is not only nice to have, but is required by law. It is considered a sustainability topic and must therefore be included in the sustainability report.

Obligatory Diversity Standards

The concept is relevant in several areas of ESRS and is covered by some Disclosure Requirements. We have highlighted the relevant passages for you:

🤓 Diversity in top management: there is a requirement to disclose quantitative and qualitative data on the composition and diversity of administrative, management and supervisory bodies (ESRS 2 GOV-1).

👥 Diversity within the company’s own workforce (ESRS S1): In addition, gender balance at top management level (S1-9) is important. Companies must identify ways to promote diversity and prevent discrimination within their own workforce (S1-1).

⛓ Diversity in the value chain (ESRS S2): Similarly, ways to promote diversity and prevent discrimination among suppliers and partners along the value chain must be reviewed for diversity policies.

These standards are mandatory and must be disclosed from 2024 by all companies covered by the Corporate Sustainability Reporting Directive (CSRD) – it affects nearly 15,000 companies in Germany.

Voluntary Diversity Measures

The ESRS provide guidance on how to respond to the Disclosure Requirements in more detail. These instructions are called Application Requirements (AR) and represent the counterpart to the Disclosure Requirements. The Disclosure Requirements have a rather theoretical character. Moreover, they are strategy-oriented and describe measures that are planned.

In contrast, ARs explain to companies how they can implement these theoretical concepts in practice. In relation to diversity, they can rather be seen as motivation and guidance for more diversity in the company structures. The following Application Requirements are to be regarded as a reference to ESRS S1-2 (diversity in the company’s own workforce):

🤝 How the company interacts with individuals at risk or in vulnerable situations (e.g., whether specific approaches are taken and special attention is paid to potential barriers).

👐 How the organization considers potential barriers to engaging people in its workforce (e.g., language and cultural differences, gender and power imbalances, divisions within a community or group).

💬 How the company provides information to people in its workforce that is understandable and accessible through appropriate communication channels.

🗣 Any conflicts of interest that have arisen within its workforce and how the company has resolved them.

🌈 How the company strives to respect the human rights of all stakeholders involved, such as the right to privacy, freedom of expression, and peaceful assembly and protest.

Conclusion

In this article, we have explained what is behind the diversity concept and elaborated on its significance in the context of the European Sustainability Reporting Standards (ESRS) and the Corporate Sustainability Reporting Directive (CSRD).

Diversity refers to the recognition and appreciation of diversity among people, both organizationally and socio-politically. The ESRS place particular emphasis on diversity in relation to top management, the company’s own workforce and the value chain. Here, companies must disclose quantitative and qualitative data on diversity in administrative, management and supervisory bodies.

Effective diversity management offers several benefits, including increased profitability, talent attraction, employee retention, greater creativity and innovation, better decision-making, higher productivity, and improved corporate image.

Companies can take steps such as developing inclusion policies, diversity and inclusion training, targeted recruiting, and setting diversity goals to promote diversity.

Overall, then, diversity is an important consideration for companies that is not only required by law, but also leads to business success.

Contact us if you need assistance with sustainability reporting requirements and the guidelines they include!

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