Diversity: the investment edge
While it seems that we have entered a new period in history where equality through diversity is now an expectation, as investors it is important to look not only at the progress made but also to take time to understand why diversity is so important.
Why is it such an area of focus? There is a business case for diversity, beyond it being the right thing to do. Taking gender diversity as an example, we can clearly see why even the most uncompromising investor can benefit from taking notice of how a company is addressing gender inclusion, as we move beyond accepting differences and celebrating them instead.
THE BUSINESS CASE
Gender diversity has gained significant attention, with initiatives such as the 30% Club launching in Australia with the goal of achieving 30 per cent women on ASX 200 boards. As at December 2018, female representation on ASX 200 boards reached 29.7 per cent from 19.4 per cent previously when the initiative first launched in 2015.
Why do we care? Because increasingly, data is showing that more companies with greater workforce diversity have better profitability. A 2016 MSCI paper suggests that more gender diverse companies are able to harness higher levels of creativity to drive improved decision-making, suggesting better use of available talent, which benefits both the economy and companies.
It’s not just about having more women, it’s also about where they are. In particular, there is increasing emphasis on having more women progress to levels where strategic decisions are made to directly influence business direction.
McKinsey revisited the business case for inclusion and diversity and found that the relationship between diversity and business performance persists. Companies in the top quartile for gender diversity on their executive teams were 21 per cent more likely to outperform companies in the fourth quartile in terms of profitability.
Companies at the other end of the spectrum, with low diversity in management, may be penalised by their lack of gender representation. The greatest costs borne from gender bias are those of the opportunities forgone from the lack of diverse representation.
RISK REDUCTION
How can diversity reduce risk? A diverse board introduces different styles of cognitive thinking to assist with problem-solving, ultimately minimising the risk of group-think. Studies have also found that having more women on boards and committees tends to be associated with greater transparency, enhanced earnings quality, and reduced probability of bankruptcy.
However, while companies continue their focus on increasing diversity through new hires, there is also a challenge in promoting and retaining women and other diverse employees. One reason is explained by the latest Australian Workplace Gender Equality Agency (WGEA) scorecard showing the gap between male and female wage rates remains stubborn. The slow and incremental pace of improvement means women earnt on average 79 per cent of men’s full time total remuneration in 2018.
On a global scale, it is estimated that the loss in human capital wealth arising from gender earnings disparity is $160.2 trillion – twice the value of GDP globally. These are the kinds of numbers that deserve attention from investors.
At the very least, encouraging diversity may improve how a company is run, as was noted in the founding of the 30% Club where “a critical mass of three or more women can cause a fundamental change in the boardroom and enhance corporate governance”.
HOW TO INVEST IN COMPANIES THAT SUPPORT DIVERSITY
If you are considering investing in companies that support diversity and inclusion, there are a number of ways to do this.
Investing via a managed fund
If you’re looking at managed funds, you may want to consider reviewing the policies and processes of the investment manager or fund provider to ensure they consider Environmental, Social and Governance (ESG) factors.
Investing directly
If you invest directly through the buying of shares, there are several tools that can help you understand a company’s approach to ESG, including diversity. For example, a range of sustainability scores are available from ESG data providers. These tools can help you consider the sustainability approach of companies when making investment decisions. It’s important to point out that sustainability scores and data are not an evaluation of an investment’s financial performance, and do not provide an assessment of overall investment merit. Rather, they should be used in conjunction with other measures for a more complete approach to investment portfolio construction.
IN SUMMARY
What investors are starting to realise is that the case for diversity is not just about social progression. Diversity can help deliver long-term sustainable profitability. As we have seen from the emergence of movements amongst our communities to campaign for better and fairer outcomes, this same discussion is being had with companies, encouraging them to increase diversity in their workforce.
Where is this going? While awareness of the issue has undoubtedly increased, there continues to be a long path ahead as we begin to see benefits in areas beyond gender and racial equality, by being more inclusive for those of different abilities, religions, lifestyles and generations.
Emma Pringle is head of customer governance and sustainability at BT
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