Diversity

The destructive potential of prejudice

Author: Paul Donovan, Chief Economist, UBS Global Wealth Management

Diversity and inclusion could become critical issues in determining economic success or failure in the decade ahead. If we want to use technology to its best advantage, we need to hire the right person in the right job at the right time. 2021 could see advances in starting to close the data gap to measure diversity.

The world has begun a period of significant structural change, labelled by economists “the fourth industrial revolution”. Where we work, how we work, how we consume and what we consume are all going to change. This change will be brought about by new methods of communication, robotics, automation and artificial intelligence. As with every previous industrial revolution, the temptation is to focus on technology. There is novelty and perhaps an element of sensationalism around that. But technology is not especially important in itself: it is how we use technology that is economically and socially revolutionary.

This focus on the use of technology means that diversity and inclusion become critical issues in determining economic success or failure in the decade ahead. If we want to use technology to its best advantage, we need to hire the right person in the right job at the right time. Prejudice irrational discrimination stops this from occurring. The best person will be rejected for an irrational reason. Prejudice can also demoralize existing staff and prevent them from doing their best work. Why try your best if the system is against you?

In addition, diversity in decision making will become more important. Revolutionary change throws up new challenges; a monoculture in decision making is unlikely to consider all of the potential opportunities that these changes will create. More seriously, a monoculture is unlikely to consider all of the potential risks that these changes will create. This is true in any period of change, but the more radical the changes, the greater the opportunities and risks, and the more important it is to have diversity of opinion in the decision making process.

Diversity and inclusion are the obvious ways to achieve economic success in the fourth industrial revolution. However, structural change also risks undermining diversity and inclusion by encouraging prejudice. The years ahead are likely to see increased inequality. Relative income and, perhaps more importantly, relative social status will change, and some people will experience falling income and status. These losses take place in an ever more complex world, and the cause of any loss is hard to understand. Anything that appears to offer a simple explanation will be an attractive alternative to trying to grasp the complexity of the real world.

The blend of relative loss and complexity encourages scapegoat economics: blaming losses on the supposed malicious actions of a minority in society. Scapegoat economics supports the fiction that your losses are not your fault, and that there is a simple solution that can restore your lost income and status. This leads, inexorably, to prejudice politics. There is a political appeal in falsely suggesting that excluding a minority from the economy will return social and economic status to the way it was. 

This battle between the obvious benefits of diversity and inclusion and the political appeal of prejudice will determine more than economic success. Minimizing prejudice is at the heart of the sustainability crisis too. If we want to maintain global living standards, we have to learn how to do more with less. We need to be able to produce better economic outcomes with fewer environmental resources. The fourth industrial revolution can help achieve that. Many of the changes ahead are about increased efficiency, be it working from home reducing the wasted resources of office space, or localization reducing inventory waste and transport costs. But prejudice directly stops the benefits of the fourth industrial revolution from being realized. The battle for a more sustainable future rests on our ability to contain prejudice.

Bottom line: investor demands may improve the data available on gender diversity in 2021, but more is needed in other areas.

Returns to portfolios of retailing stocks with higher Glassdoor overall scores

Sources: UBS Quantitative Database, UBS Evidence Lab, Glassdoor, 2018. For each year, UBS Global Research ranks companies with Glassdoor overall scores by that score and measures associated equity market returns. The chart shows equity market returns of the top half of stocks in the retail industry (equally weighted) by annual cohort and relative to the returns of all the stocks in that industry.

UBS Research has found that how companies are rated by their employees matters for stock market performance. As shown by this graph, companies in the global retail sector with higher employee satisfaction (as measured by Glassdoor overall scores) have shown better performance in equity markets consistently year after year.

UBS Perspectives on Sustainable Finance for the Davos Agenda 2021

Media Event with Axel Weber, Ralph Hamers, Suni Harford & Huw van Steenis.


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Want to know more?

To get more insight into sustainable finance in the year to come, download your copy of Sustainable Finance: Ten Trends for 2021.

Download Sustainable Finance report (PDF, 8 MB)

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