The corporate world, investors and lawyers are fired up by the reputational and financial risk of allegations of ‘greenwashing’ – and rightly so. But there is another ESG risk on the horizon – ‘genderwashing’.
Today, on International Women’s Day we will see businesses across the globe use the occasion to talk about their achievements on gender equality. But, a delve behind the slogans and statistics promulgated by companies suggests that the reality of progress on gender equality in the workplace does not always match up with what a company is promoting. As more and more investors conduct ESG due diligence, companies need to be prepared to reconsider their efforts and transparency around gender equality if they want to avoid being tarnished with the label of genderwashing.
Here, S-RM discusses the risk of genderwashing and the pitfalls that businesses should be aware of.
Following in the footsteps of ‘greenwashing’
Green credentials are an increasingly powerful tool being used to demonstrate to investors a commitment to sustainability, as well as complying with regulation and helping to sell consumer and financial products. But, for a company to avoid allegations of greenwashing, any statements or commitments it is making about its green credentials need to be backed up with transparency. This includes clear and measurable policies, actions and achievements. Companies need to avoid falling into the trap of rushing to burnish their green credentials as they increasingly come under scrutiny. The risk of greenwashing is now sitting higher on the risk register of companies, particularly for the General Counsel, and we see this being played out in courtrooms globally, from activist investors to class actions, supported by a range of new or bolstered laws and regulatory powers threatening significant civil penalties for companies and their directors.
The regulatory and legal attention paid to greenwashing is helping to focus the minds of investors, policy-makers, employees and consumers on the scrutiny and transparency that should be applied to other ESG principles that more and more businesses are having to consider in their day-to-day operations and strategic priorities. Today, on International Women’s Day, it seems appropriate to turn our attention to the risk of genderwashing.
Equality, diversity and inclusion is emerging as one of the most important principles of ESG, and, within this, gender is the most reported on issue. For large cap or listed businesses, there is a growing volume of rules and regulations around gender equality, and, for private equity, equality, diversity and inclusion is one of the most common principles on which institutional investors measure the ESG performance of their General Partners. In what can often be a confusing and nebulous ESG landscape to navigate, equality, diversity and inclusion passes the materiality test for most companies. It offers clear metrics a business can be measured by and KPIs are relatively easily gathered and analysed.
Selective measurements and disclosure
The first step in avoiding the risk of genderwashing is to get your data in order – make sure the metrics that the business uses to measure its progress on gender diversity are fit for purpose, and that the data generated is transparent and publicly available.
A crude and basic measurement of gender diversity in a firm is the number of women employed and their average pay. It is often these statistics that you will see displayed on company websites or social media posts on International Women’s Day. However, these figures, usually derived from gender pay gap reporting, deserve a deeper analysis. Any ESG due diligence investigation will go further and interrogate the data behind these figures – if you’re selling a narrative of gender equality and 50/50 representation for women, you need to make sure the evidence does not tell a different story.
Gender pay gap reporting is now mandatory in many countries. It can be a valuable tool in scrutinising data further and delving into some of the underlying causes behind variations in a woman’s journey through the workforce, but too much of the reporting is vulnerable to manipulation or selective disclosure. In the UK, for example, gender pay gap reporting became mandatory in 2017 for all companies with more than 250 employees. In an impressive exercise in transparency, a government database now makes this information publicly available. However, enforcement mechanisms or sanctions for failing to comply with these reporting obligations, or for publishing misleading data, are scant. Meanwhile, as more companies review their ESG stance, or find themselves subject to an ESG due diligence investigation, we can expect to see more scrutiny on all companies, regardless of whether they have made gender pay gap disclosures.
"As more companies review their ESG stance, or find themselves subject to an ESG due diligence investigation, we can expect to see more scrutiny on all companies, regardless of whether they have made gender pay gap disclosures."
There are six figures a UK company must disclose in its gender reporting. However, it is still rare to see a company publicly promoting any statistics other than the headline figures of a company’s average pay or its proportion of or total number of female employees. One of the most significant pieces of data that must be reported by a business is the percentage of women in each pay quartile. Yet these quartiles are persistently ignored when companies talk about their gender credentials, despite the information being publicly available on a government website. Take, for example, a well-known energy company that frequently leads the lists of top employers tackling gender equality. Analysis of its pay gap reporting shows that women still only account for 16.1 percent of the upper pay quartile, followed by 10.3 percent of the next upper middle quartile. This type of information is what an ESG due diligence investigation will uncover and it runs the risk of exposing a company's claims on ESG to fall short of reality.
To avoid genderwashing being uncovered in a due diligence exercise, companies should therefore make sure they are really interrogating the data uncovered in their gender pay reporting, ensuring it is being used to inform policies and decision-making rather than just as part of an ESG disclosure exercise.
"To avoid genderwashing being uncovered in a due diligence exercise, companies should therefore make sure they are really interrogating the data uncovered in their gender pay reporting, ensuring it is being used to inform policies and decision-making"
Beyond gender pay gap reporting, there is no established list of metrics for disclosure when it comes to gender diversity in the workplace. Whilst helpfully enabling companies to tailor their ESG disclosures to the business model or sector, this approach also runs the risk of creating a culture of selective measurements and disclosure according to what could boost a company’s ‘investability’ or reputation. For example, it is common practice to measure how many women return to work after maternity leave. Returning to work after having a baby is an important tool to assess a company’s maternity policies, but this is just one snapshot in time. It is far more insightful to look at how many of these women remain with the company after six months, a year and so on. These metrics would speak more powerfully to the culture for working mothers in a firm.
Headline numbers can mask reality
Regulatory frameworks have been a driving force towards increasing gender diversity within companies. Some countries have binding quotas for gender diversity on boards, others have soft quotas and voluntary targets. For example, the Hong Kong Stock Exchange mandates all of its listed companies must have at least one female board member by the end of 2024. Other countries, such as the UK, adopt a voluntary approach – FTSE 350 companies have been given a voluntary target of their boards and leadership teams having a minimum of 40 percent female representation by the end of 2025. As a result of this push on gender diversity at senior levels, a company will often use accompanying statistics in their annual or ESG reports, especially ahead of a listing.
"Another potential red flag for genderwashing is the appointment of women to new seats on boards."
However, these headline numbers that can enable a company to push its female credentials may mask a different reality, that any ESG due diligence review could quickly uncover. A recent FTSE Women Leaders Review, published in February 2023, dives behind the headline numbers. According to the report, whilst female representation has undoubtedly increased, women are still over represented in certain roles. In the FTSE 100, for example, 69 percent of human resource director roles and 60 percent of company secretary positions are held by women. Yes, this is a positive message that can be pushed out on gender equality, but the pathways to these positions are already the most well-trodden for women. It is in other roles, such as CEO and CFO, that the challenge is harder. And this is borne out when looking at the statistics – still only 9 percent of CEOs in the FTSE 100 are women.
"While these companies can point to progress in pure numerical terms, their genuine progress on gender equality is questionable, and would be quickly highlighted in any ESG due diligence engagement."
In some markets, women hold more directorships than men on average. As a result, board diversity will increase for more companies, enabling them to perform better on ESG metrics, but deeper analysis will show that this does not result in a growing number of individual women operating at this level. Another potential red flag for genderwashing is the appointment of women to new seats on boards. Research from the US shows that in 2022 82 percent of the board seats gained by women at companies in the Russell 3000 were actually for newly added seats, rather than filling seats left vacant by a man. While these companies can point to progress in pure numerical terms, their genuine progress on gender equality is questionable, and would be quickly highlighted in any ESG due diligence engagement.
There are very few initiatives or reporting requirements that capture the progress of women below board level. This can obscure what is happening at the executive management level – the engine room of the company and arguably a more accurate measurement of gender equality given a woman will only hold the one role, unlike on a board. Here, the UK is ahead of many other countries, with the aforementioned FTSE 350 targets applied for both boards and leadership teams. However, recent figures show the scale of the challenge. Whilst the FTSE 350 has admirably just met its target for female board representation at 40.2 percent, well ahead of schedule, female executive committee representation, which has the same target of reaching 40 percent by the end of 2025, still stands at 27 percent, far below where it needs to, or should, be.
We also see evidence of companies publicly promoting the arrival or presence of women on their leadership teams, particularly ahead of investment rounds or a listing, which can help to bolster their ESG credentials. On the face of it, this is a boost for gender equality at the company. However, a closer look will often see these to be lateral hires in. Whilst this gives a quick win, any investor doing their ESG due diligence may question why the business has not managed to build a pipeline of capable, experienced women within its ranks or, if it has, what is the culture that prevents their advancement.
The challenge is clear for all to see. Gender equality is up there with sustainability as forming a core part of ESG risks companies need to be aware of and taking action on. It requires the same attention in company policies and, more importantly, actions, if the business is to avoid charges of genderwashing. Get it right, and you will see greater employee retention and productivity, in what is still a tight labour market in many parts of the world, as well as the proven benefits of having more women in decision-making roles. But, get it wrong and you open yourself up to the potential for legal action and reputational damage that can materialise in loss of investor, employee and consumer confidence.