How to Invest in Diversity

How to Invest in Diversity

Invest in Diversity, Equity, and Inclusion

Investors zeroing in on the bottom line might miss a key factor to a company’s long-term success: its commitment to diversity, equity, and inclusion. Gender equality, diverse representation from the workforce to the boardroom, and going above and beyond environmental, social, and governance (ESG) benchmarks drive innovation, attract top talent, and help keep a business resilient, even during market downturns.

What Is Diversity, Equity, and Inclusion?

Just as climate change, social diversity, and sustainable living have become central issues to communities around the globe, diversity, equity, and inclusion (DEI) have become core values for companies and consumers. Policies like flexible working, ethical sourcing, fair wages, and support for local communities are just a few ways that companies support DEI.

DEI empowers people at all levels within a company, especially as experienced by historically underrepresented groups. Diversity of age, gender, ethnicity, religion, disability, sexual orientation, education, and national origin allows for a range of experiences and voices in decision making. Equity ensures fair access to opportunity for everyone, from a board of directors to assembly-line workers. Inclusive policies and actions ensure that everyone in the community is treated equally and helps them feel as though they belong and are respected.

Metrics prove the merits behind diversity, equity, and inclusion. According to the Wall Street Journal, in 2019, the twenty most diverse companies had an average annual stock return of 10% over five years, compared to 4.2% for the twenty least-diverse companies surveyed (1). During the Great Recession (2006–2014), companies that consistently upheld inclusive workplaces cultures outperformed the S&P 500 in average stock returns (2).

There is more than one Inclusion and Diversity index, but one of the most popular is the index developed by Refinitiv. Using twenty-four metrics across four key pillars, Refinitiv ranks over 12,000 companies around the world, identifying the top 100 publicly traded companies. The index’s ranking is based on corporate pillars including diversity, people development, inclusion, and news controversies. Powered by ESG data, the index spotlights top-rated companies like Johnson & Johnson, Accenture, PepsiCo, and Verizon (3).

Diversity, equity, and inclusion are also key in environmental, social, and governance (ESG) benchmarks. Calling it sustainable investing, socially responsible investing, or mission-related investing, investors who prioritize ESG ratings also note a pattern: companies with high ESG ratings tend to show lower volatility in stock prices, while companies with controversial environmental, social, or governance issues underperform (4). Taking a proactive approach to ESG issues builds a positive reputation for business, one of many intangible assets that comprise a large part of a company’s asset value (5).

Today, a diverse team that focuses on environmental, social, and governance issues can make a difference between success and failure. There’s no denying that a more challenging world means that companies need more effective teams. That’s why investors put their money in companies that foster DEI initiatives and meet ESG benchmarks.

Why Invest in Diversity, Equity, and Inclusion?

Diversity, equity, and inclusion efforts foster a dynamic business environment, boost idea generation, and are indicators of long-term success, all of which are markers of good investment opportunities.

Investors looking for successful companies note a business’s top talent and turnover rate; businesses whose workforce is gender diverse are able to both recruit and retain the best employees. People stay committed to companies who have inclusive cultures, with strong policies to combat sexual harassment and discrimination. Innovation is another success indicator. Inclusive business cultures and policies not only foster creativity and innovation (they reported a 59% increase) but a sharper assessment of consumer interest and demand (a nearly 40% increase) (6).

Diversity powers performance. Management teams that are diverse in gender, country of origin, career path, and background deliver higher revenues, in one study earning nearly 40 percent more, on average, than companies with less diverse management teams. Environmental, social, and governance performance also got a boost from diversity. When board members bring a collective wealth of backgrounds and experience to the table, a greater number of stakeholders feel that their needs and interests have been heard. DEI also helps companies reach a global customer base. According to a study by the Harvard Business Review, “A team with a member who shares a client’s ethnicity is 152 percent likelier than another team to understand that client” (7).

Moreover, companies that invest in their DEI efforts achieve higher returns. McKinsey’s Diversity Matters study examined data (including financial results and the composition of top management) of 366 public companies across a range of industries in Canada, Latin America, the United Kingdom, and the United States. The study found that: 1) “Companies in the top quartile for racial and ethnic diversity are 35 percent more likely to have financial returns above their respective national industry medians” and 2) “Companies in the top quartile for gender diversity are 15 percent more likely to have financial returns above their respective national industry medians” (8).

Measuring diversity and inclusion in practice has its challenges, but also its benefits. According to Dr. Rohini Anand, Sodexo Corporation’s senior vice president and global chief diversity officer: “For every $1 it has invested in mentoring, it has seen a return of $19” (9). At MGM Mirage, DEI is measured in human resources, purchasing, construction, corporate philanthropy, and sales and marketing. It even includes editorial coverage about its DEI efforts as having advertising value.

As diversity and ESG become ever more important on investment reports, portfolio managers are seeing correlations in positive returns. Investing in companies that value diversity, equity, and inclusion and proactively strive to meet environmental, social, and governance benchmarks isn’t just a way to identify companies that have an edge on their competition. It is also a way to embrace and promote these values in the corporate world.

How to Invest in Diversity, Equity, and Inclusion

Investors interested in diversity, equity, and inclusion appreciate that meaningful change has value that can be measured. For investors interested in supporting a broad swath of companies that score highly on indexes that measure DEI and ESG, a search on Magnifi suggests that there are a number of ETFs and mutual funds to consider:

• Invest in diversity
• Invest in women and diversity
• Invest in ESG

References

1. Holger, Dieter, “The Business Case for More Diversity,” October 26, 2019, Wall Street Journal, https://www.wsj.com/articles/the-business-case-for-more-diversity-11572091200.
2. “Why Diversity and Inclusion Matter,” June 24, 2020, Catalyst.org, https://www.catalyst.org/research/why-diversity-and-inclusion-matter/.
3. “Diversity and Inclusion Indices,” accessed November 21, 2022, https://www.refinitiv.com/en/financial-data/indices/diversity-and-inclusion-index.
4. Stevens, Pippa, “Stock performance study shows companies should take environmental and social factors seriously,” February 7, 2022, CNBC.com, https://www.cnbc.com/2020/02/07/esg-high-controversy-events-can-cost-stocks.html.
5. Protecting intangible assets: Preparing for a new reality, August 2020, Lloyds and KPMG, https://assets.kpmg/content/dam/kpmg/uk/pdf/2020/08/lloyds-intangibles-6-aug-2020-.pdf.
6. “Why Diversity and Inclusion Matter.”
7. Hewlett, Sylvia Ann, Melinda Marshall and Laura Sherbin, “How Diversity Can Drive Innovation,” December 2013, https://hbr.org/2013/12/how-diversity-can-drive-innovation.
8. Hunt, Dame Vivian, Dennis Layton, and Sara Prince, “Why Diversity Matters,” January 1, 2015, https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters.
9. Mason, Elle, “Opportunities to Make DEI a Fundamental Part of L&D,” March 10, 2021, CSIGinc.com (blog), https://www.cgsinc.com/blog/opportunities-make-dei-fundamental-part-ld.