Diversity driving equity returns – Fund Selector… Leave a comment

As more companies implement DEI policies, equity investors who target these “diversity leaders” will benefit from higher potential returns.

This is based on research by AB, which has found the trend to be especially strong for businesses that rely on human capital to drive innovation and business performance.

“A company’s success increasingly hinges on its capacity to see and meet challenges from different perspectives, and a deep bench of diverse talent often provides an important competitive advantage,” said Gayle Baldwin, senior research analyst, equities at AB.

In short, promoting DEI does a lot of good – for employees, the business and investors alike – by creating a more inclusive, productive labour force.

New workplace dynamics

Across age, gender, sexual orientation and race, there are notable shifts in the global workforce.

In the US, for example, research by AB found that 75% of working-age adults identified as white in 2010, according to the US Census Bureau. The number dropped to 64% in 2020 and is expected to fall to about 53% as the next generation reaches adulthood.

“Forward-looking companies are embracing these demographic changes. We think those that harness a more diverse population by reshaping their recruiting, culture and employee development will have a clear strategic advantage,” explained Vivian Lubrano, portfolio manager, equities at AB.

A culture of information sharing, productivity, trust and employee satisfaction is an essential ingredient. Psychological safety is important, too, fostered through sincere empathy and commitments to reducing workplace bias so people feel they can be themselves.

“These all orbit alongside innovation, which exponentially builds on itself as trust grows and ideas flow openly within and across teams,” added Lubrano. “At companies where innovation really matters, we believe that DEI can have enormous influence on business success.”

Being more accountable

Many companies fail to capture the benefits of DEI, despite its proven connection to bottom-line performance.

Lack of accountability is a big reason, believes AB. Even among companies with DEI initiatives, only 26% of senior leaders are tasked with specific DEI goals, with even fewer are focused on reaching DEI targets or applying them to leadership or employee performance evaluations, according to PwC Health Research Institute Global Diversity and Inclusion Survey data.

Meanwhile, a recent McKinsey report that studied 1,000 large companies in 15 countries linked gender and ethnic diversity to enhanced financial performance.

While the direct link between DEI and stock performance is still emerging, AB research suggests that among global companies that report gender diversity metrics, shares of the top 20% outperformed lower scorers by about 4% over three years, with similar results for slightly longer periods.

Finding value in DEI

For AB, identifying diversity leaders with outperformance potential requires a range of inputs, from traditional financial reports and quant research to data science analysis of recruiting websites and employee blogs.

“Used together, these non-traditional data sources combined with fundamental research are much more telling of a company’s commitment and progress around DEI,” said Baldwin.

The firm also seeks companies aligned with relevant UN Sustainable Development Goals, namely gender equality (#5), decent work/economic growth (#8) and reduced workplace inequalities (#10).

“In the post-Covid business world, human capital is more valuable than ever. But it’s a fluid asset that many investors don’t fully appreciate or know how to measure,” added Baldwin.

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