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In this special, two-part episode of Coffee Chat with CastleHill, Managing Partner Tim Carbery is joined by Yakut Akman and Alpa Inamdar as they consider the Environmental, Social, and Governance (ESG) impact of diversity in the financial industry.

While the push for racial and ethnic diversity is far from new, focus over the past year has reinvigorated companies in every industry to examine their actions regarding diversity and inclusion, including their third-party vendors. Yakut and Alpa bring their decades of experience in the industry to the discussion to examine the necessity of accountability, transparency, and education.

The Challenge of Monitoring ESG and Third Parties

There is both an internal and external landscape to consider when discussing diversity in the workplace. While there has been significant focus on companies’ internal efforts to diversify their workforces, demand for organizations to extend their own standards to their third-party vendors has increased.

Third-parties are a resource: a company that other companies can outsource specialized tasks to in order to boost their productivity and efficacy. It is tempting for companies to treat these third-parties as “other,” neatly packaged contractors that have little bearing on the primary organization. This distinction is illusory- especially when it comes to risk.

“We talk about third-parties as a separate entity, but third-parties are truly an extension of whatever operation we have in the company,” Yakut points out. “We can never outsource our responsibility. We are still very much accountable for everything that third-parties do. Everything that we uphold ourselves, in terms of our policies and standards, apply to third-parties, as well.”  

Actively engaging in third-party accountability is challenging for a number of reasons. Companies try to protect themselves with contracts and threat of consequence, but ESG’s slippery definition and evolving parameters make it difficult to establish meaningful monitoring on third-party activities.

No matter how well defined a parent company’s policies and procedures may be, “most of these organizations do not have a standard metrics or reporting that you can actually measure how yourself as an organization or your third-party vendors are doing,” explains Alpa.

She lays out a compelling example of a common phrase with little structural integrity to its reporting: a “net carbon zero footprint.”

“If we think about environmental factors, the ‘net carbon zero footprint,’ what does that really mean? Or ‘being green.’ How do you measure being green? We put a lot of policies and procedures in place, on the legal, contractual side, we put these great words, like ‘we will measure your ESG accordingly’— but what is that? I think that data, the metric, is still lacking significantly.”

The Positive Business Impact of a Diverse Business Model

In 2015, McKinsey & Company released a study that linked workplace diversity with a positive impact on financial gain.

“If you have a diverse racial workforce, you are [approximately] thirty-five percent more likely to outperform, from a financial perspective, compared to the national average. That’s huge,” States Alpa. “The minute you have a diverse workforce, you make sure that people have different ideas, different innovation, and that only happens with a diverse workforce.”

From a risk perspective, varied voices and different backgrounds lead to a more comprehensive view of potential pitfalls in policy and procedure, increasing a company’s awareness of possible risks. The beneficial effect of broadening the influences within a company extends beyond its own infrastructure; companies who hire a diverse range of third-party vendors may also see a greater financial benefit.  

Yakut suggests that diversity’s positive impact on business is one of the key elements to securing progress in the future. “As people understand the value that these diverse vendors bring, they don’t look at it as a ‘nice’ thing to do, they see a business value in it. That’s when they shift to hiring these vendors more and more.”

There are numerous avenues for companies to consider when looking to broaden the scope of their vendors. One Is geographical; whether their vendors are congregated in a particular region or place. Another is the internal makeup of the vendor in question.

Many organizations are putting a sourcing diversity advisory council in place. Alpa explains: “Where they work with procurement and the businesses to ask, do we have diverse suppliers? Are we managing that risk, or do we have too much concentration in one geographic region, the products and services they are offering? How many of these businesses are women-owned, how many of them are owned by different nationalities and cultures?”

Change Begins with Company Culture

While recent emphasis has been on the understanding of accountability between a company and its vendors, the necessity of organizations turning the magnifying glass inwards cannot be overstated.

As Yakut and Alpa unravel the complexities of their experiences in the financial industry, Yakut reflects on the old tendency to think, ‘what would a man do’— the expectation for women and minorities in the workplace to adhere to the predominately white male environment surrounding them.

“One of my favorite sayings is: if you torture numbers badly enough, they’ll confess to anything,” Yakut remarks. She points to the discrepancy between a company’s lower ranks, which often has high employee diversity, versus a company’s upper management. “When you look at the make-up of the vast majority of an organization, it’s fifty-fifty male-female in the lower ranks, then you go up, and somehow it’s eighty-twenty. What changed along the way? There were some stops where women and minorities had to get off, but men didn’t. How did the journey work?”

Where numbers and percentages may have cloaked homogenous hierarchies in the past, efforts have been made to introduce more authentic measures of workplace diversity. “While we gave it lip service, saying we have to have more minority, more women, etcetera, we weren’t allowed to look at the numbers. They said, ‘No, no, no, that’s top secret, we can only tell you this,’” She explains. “Now, in a lot of companies, diversity is being measured at the CEO level, down. That’s how you really hold people accountable. That’s how you see progress or lack thereof. That’s how you start asking: how do we move the needle?”

One way to support the evolution of transparency in diversity and other aspects of ESG policy is through accountability and reporting. “How do you measure accountability in direct numbers? The numbers state how you are performing,” Says Alpa. “A lot of organizations have made it a part of their performance goals and part of their incentive plans. How diverse are you in your common workforce versus your supply chain management? How diverse are those products and services you are bringing in? That’s one way to benchmark it.”

A second way to increase a company’s ESG awareness is through training. “As leaders and managers, are we putting out the right training about diversity, microaggressions, and some of the stereotypes, the unconscious bias?” Asks Alpa. “Hold leaders accountable. Make sure you have the right data.”

While training is a crucial element of a company’s journey towards accountability and transparency, Yakut draws a distinction between the elasticity and endurance of education versus band-aid training regimens.

 “We put a lot of stock in training,” Yakut points out. “Organizations think that if they send their employees to a three-hour diversity training, they are all going to come out big proponents—”

“Diversity champions,” Alpa chimes in, laughing.

“It doesn’t happen! This is an ongoing battle,” Yakut urges. “You want people to have critical thinking and the ability to connect the dots and say, ‘Ah, this is what makes sense, this is the right thing to do, this is what is really going to provide benefit for our employees, for our customers, for our shareholders. This is what is going to make our organization greater than it would be otherwise,”

“And that brings me to something that is fundamental to all of this, which is culture,” She continues. “I think that the culture of an organization is set at the very top.  Making sure that it trickles down properly, assuming it’s the right tone at the top, is so important.”

Training is a starting point, but education and company culture are the long game to success; the road to building lasting relationships and organizations capable of incorporating ESG into their every activity.

“That’s how you change the hearts and minds of people, not from a three hour or thirty-day training program.” Yakut states. “Making sure that we have that culture and we feed it and we make sure that everybody understands and they become a part of that culture is really the winning ticket.”

Join Alpa, Yakut, and Tim as they discuss all things ESG – from diversity in the workplace to the increasing importance of a company’s environmental impact – on this two-part episode of Coffee Chat with CastleHill:

Part 1: The ESG Impact of Diversity in Financial Institutions

Part 2: The ESG Impact of Diversity in Financial Institutions