We believe that diversity is material—it matters to corporations' ability to grow, and it helps investors identify opportunities. In addition, diversity is material to markets overall—a growing body of research points to the benefits to economic growth of closing wealth gaps based on gender, race, sexual orientation, etc. Longer-term societal changes underpin four global investment drivers, creating opportunities for companies that are more diverse and have robust human capital management policies and practices.
A systems-level approach to investing for diversity and equality
The guiding question for our research on this investment theme is “How are diversity, equity, and inclusion connected to the actions of investors?” To analyze the question and identify investable ideas, we took a systems-level approach.
System-level thinking is a way to view a problem as a series of complex, dynamic, and interrelated relationships impacting one another both directly and indirectly. Inequality based on personal characteristics like gender, race, or sexual orientation is an example of a system-level challenge, one that requires examining interrelated dynamics across areas like access to education, health, housing, credit, and economic outcomes for women or minorities.
Importantly, these interrelated dynamics tied to diversity-based inequality—this system—are critical for investors to understand in order to position their portfolios for the long term. Beyond considering impact on their investment portfolio, investors can also consider how intentionally investing to help address UN Sustainable Development Goals 5 (Gender Equality), 8 (Decent Work and Economic Growth) and 10 (Reduced Inequalities) can create long-term benefits for both themselves and society.
In our view, there is a positive and reinforcing relationship between higher equity and inclusion, and additional opportunities for investors (all else equal). We see three interplaying dynamics that feed into the relationship between investments and equity and inclusion:
1. There is a positive relationship between economic growth, equity and inclusion, and investments. McKinsey estimates that closing the racial wealth gap in the US would result in an additional GDP growth of 4–6% in a decade. More inclusive economic growth may result in improved outcomes for investment portfolios, particularly as it relates to specific types of companies (those with a long time horizon, for example). The benefits of inclusivity tend to pull through at the company level, via greater innovation or the earnings growth power that can stem from things like reduced employee turnover and better recruitment practices.
2. There is a reinforcing relationship between increased equity and inclusion and longer-term prospects for companies, as well as investment portfolios. We discuss this dynamic in detail in the inception report of this theme, as well as in our reports on the Diversity and Equality–US Companion and The commercial case for diversity and inclusion.
3. Investing to improve key “access” areas is critical to creating a more equitable and inclusive society, and may present comparable or improved risk-adjusted return opportunities. By “access” areas, we refer to four core areas where systematic access gaps based on gender, race, or sexual orientation exist: quality education, homeownership, healthcare, and capital. As we have noted before, each of these areas is uniquely tied to each community’s prospects to build wealth and contribute to their full potential. Homeownership, for example, is a strong predictor of household wealth.
To be sure, private investment is only a component of the total investment needed to address these gaps, and many require government investment or policy. In public markets, investors can seek opportunities in companies that provide products and services to help close access gaps, or in sustainable fixed income with use of proceeds that target these gaps.
How to invest in DE&I across asset classes?
We see opportunities across a wide range of asset classes. The number of funds launched with a focus on Human development, and with ESG objectives in either Engagement or Integration, has consistently increased, with an acceleration over the last couple of years.
In equities, several studies have been carried out to assess whether corporate diversity has a real effect on a firm's performance. Companies proposing solutions to close gaps that are related to minorities (wealth, credit, education, etc.) can also benefit from finding additional opportunities.
Fixed income instruments can provide exposure and opportunities to finance projects or entities that address core economic inequalities. An emerging set of financial instruments, referred to as social and sustainability bonds are issued by corporations or other entities with the explicit goal of advancing gender, racial, or ethnic equality by financing projects that promote or finance workforce training and development, affordable housing, high-quality education, accessible healthcare, and others. Municipal revenue bonds, a subset of sustainable municipal bonds are issued by government agencies to fund projects and can be used to finance the development of low-income or affordable housing; increase access to or the affordability of hospitals and healthcare; improve access to and the quality of public transportation; or improve water treatment and waste management systems.
Lastly, private markets such as private equity or venture capital impact investing strategies that explicitly aim to reduce the inequality gap between genders, or different racial and ethnic groups, are also well positioned to benefit from these broad investment trends and provide impact exposure.
Main contributors: Amantia Muhedini, Thomas Parmentier, and Michelle Laliberte
Read the full report Diversity and Equality—update (3 March 2023), which includes a reference list showing relevant publicly traded companies with exposure to this theme.
This content is a product of the UBS Chief Investment Office.