Investing With Pride

Responsible investors have long been aware of the potential correlation between good management of diversity issues and strong company performance. To mark #PrideMonth 2021, ISS ESG’s Data Solutions team delves into our trove of governance information in search of insights into how companies are managing diversity around sexual orientation.

Modern investors are increasingly focused on the diversity of companies’ board of directors. Recognizing the value-add to companies of diverse boards, ESG investors in particular have leaned into engagement campaigns on this aspect of governance.

ISS Proxy Research has been tracking the number of women on company boards for over 15 years. More recently, the Proxy team’s 2021 research cycle commenced the evaluation of whether US company boards exhibit ethnic or racial diversity. Now, as the US celebrates LGBTQ+ Pride in June, ISS ESG examines the extent to which US companies have focused their efforts on recruiting and developing directors and employees who are LGBTQ+.

In their 10-K filings, US companies disclose ‘Diversity Statements’ through which they typically elaborate on their diversity policies, if any, and draw investors’ attention to particular achievements in this area. The ISS ESG Data Solutions team identified 306 companies in the Russell 3000, 70 of which are in the S&P500, that mention LGBTQ+ policies or persons in the company Diversity Statements. Table 1 presents the trends observed in S&P500 and Russell 3000 companies’ Diversity Statements:

Table 1: Diversity Statement Trends (US)	S&P500	Russell 3000	Total
Explicit statement that sexual orientation is a diversity measure considered for director nominees	54	169	223
At least one director is LGBTQ+	8	21	29
At least one director is LGBTQ+; No formal Diversity Policy	1	7	8
Explicit statement of non-discrimination for director nominees	0	17	17
Top Rating by the Human Rights Campaign for LGBT Workplace Equality	1	2	3
Internal support group for LGBTQ+	3	4	7
Diversity only applies to the workforce	3	10	13
No substantive disclosure of LGBTQ+	0	6	6
Total	70	236	306

Source: ISS ESG data

ISS ESG Data Solutions found that 37 companies in the Russell 3000, 9 of whom are in the S&P500, have directors who identity as LGBTQ+. In addition to this finding, it was noted that approximately ten percent of the S&P500 stated that sexual orientation is a dimension of diversity considered for its director nominees.

When these results are broken down according to GICS industries (see Table 2 below), biotechnology, regional banks, and application software represented over twenty percent of the entire sample of companies with positive mentions of LGBTQ+ issues in their Diversity Statements:

Table 2: LGBTQ+ reference and GICS-8 Industry Representation (Top 11)
GICS-8 Industry	S&P500	Russell 3000	Total
Biotechnology	1	31	32
Regional Banks	2	16	18
Application Software	1	14	15
Pharmaceuticals	3	6	9
Data Processing & Outsourced Services	4	4	8
Asset Management & Custody Banks	3	4	7
Communications Equipment	2	5	7
Health Care Equipment	1	6	7
Consumer Finance	1	5	6
Industrial Machinery	1	5	6
Packaged Foods & Meats	2	4	6

Source: ISS ESG data

Based on the above data, it seems clear that research and development-intensive industries lead the pack in terms of considering LGBTQ+ issues in diversity policies and appointment of directors. Consistent with this observation, ISS ESG Data Solutions found that these industries also have more than one company with at least one LGBTQ+ director. Table 3 presents the Top 3 GICS industries by the number of S&P500 and Russell 3000 companies with at least one LGBTQ+ director:

Table 3: GICS-8 Industries with at least one LGBTQ+ Director (Top 3)
GICS-8 Industry	S&P500	Russell 3000	Total
Biotechnology	1	4	5
Application Software	0	3	3
Pharmaceuticals	1	2	3

Source: ISS ESG data

The same industries feature among the group that state sexual orientation is an element of diversity considered for director nominees. Table 4 below shows the top 8 GICS industries by the number of S&P500 and Russell 3000 companies who make this explicit:

Table 4: GICS-8 Industries who explicitly state sexual orientation is a qualification of diversity for director nominees (Top 8)
GICS-8 Industry	S&P500	Russell 3000	Total
Biotechnology	0	25	25
Regional Banks	1	12	13
Application Software	1	10	11
Asset Management & Custody Banks	3	3	6
Communications Equipment	2	4	6
Data Processing & Outsourced Services	3	3	6
Consumer Finance	0	5	5
Pharmaceuticals	2	3	5

Source: ISS ESG data

Diversity Statements are not exclusive to the US, of course. Many companies outside of the US have chosen to make such disclosure in their Annual Reports. Table 5 illustrates the number of non-US companies by country that make mention of LGBTQ+ policies or persons:

Table 5: Count by country of companies who make a mention of LGBTQ+ policies or persons
Country	Count
Australia	81
United Kingdom	30
Canada	25
New Zealand	12
Norway	6
Switzerland	4
Greece	3
Denmark	1
Ireland	1
Netherlands	1
Portugal	1
South Africa	1
Sweden	1
Total	167

Source: ISS ESG data

These observations for non-US markets are also consistent with the ISS ESG Country Rating indicator grade on Discrimination Based on Sexual Orientation. Table 6 below illustrates that the highest-rated countries for non-Discrimination based on Sexual Orientation correspond with the top reporters on the topic:

Table 6: ESG Country Rating Grade on Discrimination based on Sexual Orientation (Top 4 versus US)
Country	Grade
Australia	A+
United Kingdom	B+
Canada	A
New Zealand	A+
United States	B-

Source: ISS ESG data

In simple numerical terms, US company disclosure (306) almost doubles non-US disclosure (167) when it comes to LGBTQ+ issues. It is also interesting to note that relevant disclosure in non-US markets reflects policy across the entire workforce, with considerably less focus on the board of directors:

Table 7: Diversity Statement Trends (Non-US)	Total
Explicit statement that sexual orientation is a diversity measure considered for nominees	90
At least one director is LGBTQ+	0
At least one director is LGBTQ+; No formal Diversity Policy	0
Explicit statement of non-discrimination for director nominees	24
Top Rating by the Human Rights Campaign for LGBT Workplace Equality	N/A
Internal support group for LGBTQ+	2
Diversity only applies to the workforce	48
No substantive disclosure of LGBTQ+	3
Total	167

Source: ISS ESG data

This first glance across the available data presents an interesting story of a topic that has long been neglected by Social and Governance analysis. Our review makes a number of key findings that merit further research:

• US companies who choose to disclose their LGBTQ+ policies tend to focus more on board diversity and the appointment and disclosure of LGBTQ+ directors. That is, they implement LGBTQ+ policy through a Governance lens.
• On the other hand, non-US companies who choose to disclose their LGBTQ+ polices tend to focus more on workplace diversity and non-discrimination policies.
• Industries with a heavy R&D component tend to have clearer public commitments to diversity measures that include reference to LGBTQ+ issues.
• Countries that rate highly on ISS ESG’s Country Rating in terms of non-Discrimination on Sexual Orientation also have higher numbers of companies disclosing on this topic.

As the responsible investment market matures, we can expect a broadening of the topics being considered by investors, and it is interesting to consider whether measurements of diversity that have long focused on gender will continue to broaden beyond the issue of ethnicity and embrace other issues such as sexual orientation.

Explore ISS ESG solutions mentioned in this report:

• Leverage leading ESG and Governance data sets to customize your approach to responsible investment with ISS ESG Data Solutions.
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  • Make active ownership a key plank of your responsible investment implementation with ISS Proxy Voting Services.