NEW YORK, NY – As investors, regulators, and stakeholders become increasingly focused on corporate environmental, social, and governance (ESG) practices, many companies are disclosing and publicly committing to ESG goals. Bloomberg Intelligence predicts that investment in ESG-related assets is set to reach $50 trillion by 2025, compared with $35 trillion in 2021. However, much of the information that companies disclose is hard to measure and verify, making ESG disclosures susceptible to exaggerated or false promises. New research from Columbia Business School examines one component of ESG – diversity of a company’s workforce – and finds that companies’ using a proven goal-setting method are more likely to improve diversity before disclosure, and will continue to improve in the years that follow.

The study, Are Firms Making Sincere Efforts to Deliver Their Disclosed Diversity Targets?, finds that certain target characteristics such as numerical goals, forward-looking, and non-managerial focused goals serve as markers that companies are making more sincere efforts to reach their diversity disclosure goals. In an analysis of hand-collected company data on diversity goals from sustainability reports of S&P 500 companies from 2008-2020, Wei Cai, Assistant Professor of Business at Columbia Business School, and her research partners, Columbia Business School doctoral students Yue Chen and Li Yang, found that disclosure of diversity goals is tied to improvements in the targets companies are pursuing.

"Companies regularly express their commitment to diversifying their workforce, but it's not always clear how they can effectively achieve their goals," says Professor Cai. "Our research provides a roadmap and shows there are multiple effective ways for companies to set and reach diversity goals, including the use of numerical, forward-looking, and rank-and-file oriented goals. By incorporating these specific goals into their ESG disclosures, companies can make real efforts toward attaining their goals and diversifying their workforce."

This study focuses on three effective methods for reaching diversity targets: numerical goals, which specify a target number or percentage for a given metric, such as the proportion of underrepresented minority employees; forward-looking goals, which aim to improve diversity practices over time through initiatives such as new recruitment strategies or diversity training programs; and rank-and-file oriented goals, which aim to improve diversity at all levels of a company. After analyzing more than 400 sustainability reports from corporate websites, the researchers found that companies that incorporate numerical, forward-looking, and rank-and-file goals in their disclosures are able to improve employee diversity and are more likely to reach their goals than companies with less specific goals. The study found that companies with numerical goals increased minority employee hiring by 0.396%, while forward-looking goals led to a 0.26% increase in the recruitment of minority employees. Rank-and-file oriented goals correlated with a 0.32% increase in minority employee recruitment per firm per year.

Additional Takeaways:

• This study is among the first to conduct quantitative research on the disclosure of ESG targets. Offering important insights and guidance on extracting decision-relevant information in firms’ ESG target disclosure.
• Among the diversity goals identified from sample firms’ ESG reports, more gender targets focus on numerical goals and rank-and-file employees. However, only one-quarter of gender goals target rank-and-file employees. Compared to ethnic minority goals, the fraction is even smaller (18.32%). This finding indicates that firms often emphasize goals for subgroups such as management.

"Investors have traditionally had a difficult time evaluating the sincerity and feasibility of companies' diversity goals. However, this research provides clear guidance on what to look for in ESG disclosures, says Professor Cai. “As investors increasingly prioritize ESG considerations, these findings are crucial in helping investors identify companies that are truly committed to diversifying their workforce.”

To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.

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