D&I investing road map

A perspective from E*TRADE Securities 02/25/21

In January, business, government, and academic leaders from around the world gathered virtually to discuss the Davos Agenda, the Word Economic Forum’s outline of the most pressing issues facing the global economy. Among their top priorities: Advancing diversity and inclusion (D&I) across all areas of society. 

Corporate America has begun heeding the public call for greater diversity in business—about one-third of Fortune 1000 companies made a public statement on or commitment to racial equity between May and October of last year.1 It’s a movement that brings into focus the broader dimensions of D&I, including ethnicity, gender, orientation, and more. 

Fortunately, there are plenty of opportunities for investors to get involved in the cause when selecting assets and building portfolios. As we approach the end of Black History Month and the start of Women’s History Month, here’s a road map for those interested in supporting D&I efforts through their investment decisions.

The big picture

The business case for diversity is strong, which can mean that investing in D&I can also benefit an investor's bottom line. Many analysts agree diverse workplaces can foster innovation, reduce employee turnover, and improve overall business outcomes. A 2018 study from McKinsey & Co found that companies in the top tier for gender diversity on their executive teams were 21% more likely to have above-average profitability than their less-diverse peers. For ethnic/cultural diversity, the highest-ranking companies were 33% more likely to outperform their less-diverse peers on profitability.2

Yet, in all 62 years of the Fortune 500, there have been just 15 Black CEOs—and only three women of color. And as of January, just 1% of Fortune 500 CEOs were Black.1

D&I in the S&P 500

Researchers at The Wall Street Journal who ranked industries and companies in the S&P 500® based on a set of D&I metrics found that diverse and inclusive cultures gave companies a clear competitive edge. The 20 most-diverse companies in the study had an average annual stock return of 10% over five years, vs. 4.2% for the 20 least-diverse companies. The broad index posted an average annual gain of 8.9% over the same period.3

Source: The Wall Street Journal environment, social, and governance research analysts

Other notable highlights from the study:

  • Overall, the financial industry was the top-performing sector, with banks and insurers dominating the list of the 20 most-diverse companies. Communication services and consumer staples were a close second and third, while the energy and materials sectors came in last.
  • Larger companies tended to score better than smaller companies, likely due to the availability of resources to devote to D&I programs.
  • The average profit margin (profit before interest and tax, as a percentage of sales) of the most-diverse firms (12%) was better than that of the least diverse (8%).
  • Many high-scoring companies credit diversity for driving product innovation as well as opening new consumer channels. For example, a team of Black scientists at Procter & Gamble developed a new line of hair care products designed for Black customers.3

Bottom line: Adopting and fostering a diverse and inclusive culture is simply good business—and can produce solid returns. On the flip side, the risks for not doing so abound: Companies that lag their peers on the diversity front potentially miss out on profits, growth opportunities, and top talent—and may face increased scrutiny from the public as well as stakeholders.

Investing considerations

For investors interested in putting their own resources to work for a social cause, here are a few ideas for more diverse and inclusive portfolios: 

  • Look for leaders: Investors can actively identify diversity champions from industry reports, benchmarks, and indexes that gauge social and corporate governance practices. Fortune's Best Companies to Work For, Forbes' Just 100, Glassdoor’s Best Places to Work, and The Human Rights Campaign’s Corporate Equality Index are good places to start.
  • Explore ESG-focused funds: Environmental, social, and governance (ESG) investing focuses on companies that adhere to certain standards in these areas, and there are many mutual funds and exchange-traded funds (ETFs) that reflect these principles. Keep in mind, though, that because this strategy may eliminate or limit exposure to certain investments, it may underperform other funds or benchmarks that have a broader focus.
  • Avoid laggards: At a minimum, investors may choose to screen out companies lacking diverse representation in management, or those that don’t have diversity policies in place. A company’s corporate website, which is typically geared toward investors, is a great place to investigate. If D&I information isn’t prominent on their site, it’s a good indication it’s not a priority.

Of course, investors should also make sure that any decisions reflect their individual goals, timelines, and risk tolerance. If those boxes are checked, aligning investments with personal values is a solid next step.

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  1. The World Economic Forum, “How companies can accelerate racial justice in business,” 1/25/21, https://www.weforum.org/agenda/2021/01/how-companies-can-accelerate-racial-justice-in-business/
  2. McKinsey & Company, “Delivering through Diversity,” January 2018, https://www.mckinsey.com/~/media/mckinsey/business%20functions/organization/our%20insights/delivering%20through%20diversity/delivering-through-diversity_full-report.ashx
  3. The Wall Street Journal, “The Business Case for More Diversity,” 10/26/19, https://www.wsj.com/articles/the-business-case-for-more-diversity-11572091200

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