Should diversity matter to investors?
The US Supreme Court ruled in June that dismissing employees because of their sexual orientation and gender identity breaks the 1964 Civil Rights Act, which forbids employers from discriminating against employees on the basis of personal characteristics. Effectively, this affords greater workplace protections to LGBTQ people employed throughout the US and means that US-based companies with a corporate culture that does not support diversity of all kinds are at increased risk of legal and financial penalties.
From a global perspective, there is an abundance of evidence that more diverse teams generally tend to perform better than homogenous teams, making diversity a material issues for all companies. Yet diversity of all forms is lagging in large corporations. New research published this month found that FTSE100 boards have fewer than 10% of members from a black, Asian or ethnic minority (BAME) background.8 From an economic perspective, CIO’s chief economist believes that when part of the population is systematically excluded from employment and economic activities, there can be a significant negative impact on productivity and the national economy as a whole.
For investors, diversity indicators can be a useful proxy for identifying well-managed companies, whether this is part of a broader approach to selecting ESG Leaders, or as a standalone investment theme. Single themes focusing on diversity typically seek to invest in companies that benefit either SDG4 (gender equality) or SDG11 (reducing inequalities), which focuses on reducing income inequalities within and between countries, as well as empowering and promoting the social, economic and political inclusion of all.
Sustainable investing takeaways for investors
- Investment solutions in public markets addressing inequality have, to date, focused primarily on gender equality, largely driven by data availability. In fact, AUM in such strategies has steadily increased over the past few years, and investors interested in the topic can access the CIO theme on gender diversity.
- Impact strategies in private markets often focus on improving access to core services for low income and underserved populations. Strategies that focus on equality, social justice, local community investment, or racial and ethnic diversity are beginning to emerge across asset classes.
- Some asset managers are already beginning to engage with companies and data providers to push the diversity focus beyond gender, while the rest of the industry has space to continue to develop. Looking for managers that are actively considering these questions can enable investors to drive capital towards companies that benefit from more diverse workforces while helping to promote a more equal and sustainable society.