Advancing Diversity —and Your Portfolio

 Despite progress made, we are still a long way away from achieving equality in the workplace. Thanks to investor demand, increased data and transparency driving investment strategies and more robust impact reporting capabilities, investors now have more opportunities than ever to create more equitable outcomes for all. 

Incorporating Diversity into Investment Portfolios

It is no longer enough to create returns from your investments. It is just as important to have investments make a difference to support, or change, how companies are investing in diversity in the workplace. This includes seeking out diversity in leadership, gender equity and access to finance, education, and health care. 

Investing that includes a holistic approach to equality that includes representation can be helpful both to build a more diversified portfolio—by accessing the broadest range of asset classes, styles and geographies—and to systemically seek to solve a deep-rooted and complicated issue. When thinking about activating your portfolio broadly to support sustainable and impact investing, strategies that generally incorporate environmental, social and governance data; according to a study by the Morgan Stanley Institute for Sustainable Investing, diversified Environmental, Social, and Governance investments have outperformed their traditional peers.¹²  (I feel like there needs to be at least a semicolon in here)(I put one after data)

While it is important to get qualified women into the C-suite and the boardroom, and female ownership and developing policies supporting diversity are essential, there are other dimensions of gender equality that motivated investors can also support. For example, investing in companies providing products and services that benefit women and girls. Women, according to the World Bank, represent the majority of unbanked adults globally. Increasing access to financial services for women, such as bank accounts, can support equality and serves as a growing business opportunity as well. 

Why Has Equality and Diversity Helped Businesses?

A few possible reasons:

• Promote Difference: Creating equal opportunities established opportunity for broader ideas, working hard, incentivizing performance. Creating diverse workplaces turns out to be good business.
• Promote innovation: A more diverse perspective can improve team decision making. If everyone sitting around a board room has similar experiences and perspectives, that could create unintentional blind spots in decision-making. Further, innovative products and services that arise from diverse perspectives can allow companies to tap new markets and add new revenue sources.
• Recruit diverse talent: Different backgrounds, varied experiences, family-life balance, flexible working programs and family leave may be drivers of outperformance for many reasons, including helping companies in competitive markets attract top talent. This gives companies an edge in hiring the workers they need—especially in countries that are experiencing an aging and shrinking workforce.
• Employee satisfaction: Diversity has been shown to correlate with superior performance in terms of employee engagement.^10,11 Interestingly, there seems to be a statistically significant relationship between diversity practices and employee engagement for all employees. ¹⁰ Happy workers create more innovative products. Plus, it’s most cost efficient to keep talented employees than find replacements, so keeping your workforce motivated and engaged can help a company’s bottom line. 

Diverse Companies Have Outperformed, On Average

Equality emphasizes that a balance in representation across environmental, social, and governance can help to broaden perspectives and drive better decision-making across organizations of all sizes. As it turns out, diverse perspectives actually has the potential to increase your portfolio’s bottom line.    

According to Morgan Stanley Research from 2019, a more diverse workforce, as represented by women across all levels of the organization, is correlated with higher average returns. Companies that have taken a holistic approach toward equal representation have outperformed their less diverse peers by 3.1% per year. From 2011-2019, an eight-year period, companies with more gender diversity enjoyed a one-year return on equity that was 2% better than companies with low gender diversity.⁹ Further, these more diverse companies experienced lower return-on-equity volatility, too.

Promoting Diversity

We see real interest from our clients in integrating equality into their investment decisions. According to a recent survey from Morgan Stanley Wealth Management, high-net-worth investors said it is important that companies they invest in have policies in place to promote diversity, equity and inclusion (67%), hire and promote employees of diverse backgrounds (66%) and have people of diverse backgrounds in leadership positions (63%).⁶  

Using data from the Bureau of Labor Statistics monthly jobs report, The National Women’s Law Center found that over 1 million fewer women were in the labor force in January 2022 as compared to the beginning of the pandemic (February 2020), while men have largely recouped their labor force losses. An article from The New York Times reports that 66% of mothers with partners say that they are chiefly responsible for childcare, compared to 24% of fathers.² Further, the gender pay gap in the U.S. remains at 19% ;³ just 26% of corporate board seats in Russell 3000 companies are held by women;⁴ and only 14% of fund managers are female.⁵

Despite significant strides to promote diversity in the workforce, recent research shows that the pandemic has slowed progress. While COVID-19 has impacted all of us, it has disproportionately affected women, especially women of color. The challenges are numerous: Women are more likely to work in roles eliminated in the pandemic and, women engaging in paid labor or not, often take on a greater share of household labor, including childcare.¹  

¹ "Some gender disparities widened in the U.S. workforce during the pandemic," Pew Research Center, Jan 14, 2022: https://www.pewresearch.org/fact-tank/2022/01/14/some-gender-disparities-widened-in-the-u-s-workforce-during-the-pandemic/

² “The Primal Scream,” The New York Times, Feb. 4, 2021,  https://www.nytimes.com/interactive/2021/02/04/parenting/working-moms-coronavirus.html

³ "The State of the Gender Pay Gap in 2021," Payscale, accessed Feb 24, 2022: https://www.payscale.com/research-and-insights/gender-pay-gap/#section14

⁴ "Q3 2021 Equilar Gender Diversity Index," Equilar, Oct 28, 2021: https://www.equilar.com/reports/87-q3-2021-equilar-gender-diversity-index

⁵ "The Percentage of U.S. Female Fund Managers Is Exactly Where It Was in 2000," Morningstar, Mar 16, 2021: https://www.morningstar.com/articles/1029482/the-percentage-of-us-female-fund-managers-is-exactly-where-it-was-in-2000

⁶ "Investor Pulse Poll," Morgan Stanley Wealth Management, August 2021

⁷ "CA Bill AB 979 Seeks to Increase Board Diversity," Sheppard Mullin, Dec 14, 2020: https://www.sheppardmullin.com/

⁸ "Statement on Nasdaq’s Diversity Proposals – A Positive First Step for Investors," U.S. Securities and Exchange Commission, Aug 6, 2021: https://www.sec.gov/news/public-statement/statement-nasdaq-diversity-080621

⁹ Sources: Refinitiv, FactSet, Morgan Stanley Research; Based on an Equal weighted average 12M forward return for the North America Top 1/3 fractile of HER score versus the excess equal weighted average 12M forward return for the region, 2011-5/2019; Note: Past performance is not indicative of future results.

¹⁰ "The role of diversity practices and inclusion in promoting trust and employee engagement," Deloitte, May 2015: https://www2.deloitte.com/au/en/pages/human-capital/articles/role-diversity-practices-inclusion-trust-employee-engagement.html

¹¹ "Delivering through Diversity," McKinsey & Company, Jan 2018: https://www.mckinsey.com/~/media/mckinsey/business%20functions/organization/our%20insights/delivering%20through%20diversity/delivering-through-diversity_full-report.ashx

¹² Morgan Stanley Institute for Sustainable Investing, Sustainable Funds Outperform Peers in 2020 During Coronavirus, 2021

¹³ US Pat. No. 11,188,983