Making a positive impact on diversity and inclusion

Diversity and inclusion are becoming increasingly important to investors, and there is growing demand for products that make a positive impact in this area. Here, we find out more about how investors can make a difference and take a closer look at the M&G (Lux) Diversity and Inclusion Fund.

The current picture

Barriers to social inclusion and equal opportunities currently exist across most facets of identity, from gender and ethnicity to age and sexual orientation. These can affect all aspects of life, including employment, education, living standards and healthcare. And in many cases, such imbalances have been amplified by the COVID-19 pandemic.

Looking at the corporate world specifically, gender and ethnic diversity is improving but there remains room for improvement, especially at board and senior management level. In the UK, women make up 39% of FTSE 100 company board members, while 16% are from ethnically diverse backgrounds. In the US, the figures for S&P 500 companies are 30% and 21% respectively^[1].

Social inclusion makes economic sense

Aside from the obvious moral or ethical justifications, there are strong economic arguments for promoting social inclusion. Exclusion can lead to the loss of wages and lifetime earnings, and poor education and employment outcomes^[2], all of which can have a material impact on global economic activity. Exclusion or the perception of exclusion may also cause certain groups to opt out of markets, services, and spaces, with costs to both individuals and the wider economy. To put this in numbers, the World Bank currently estimates the human capital loss from global gender inequality alone to be $160 trillion.

Better diversity, better financial performance?

Conversely, promoting diversity and inclusion has been linked to good financial outcomes. In 2019, companies with good gender diversity were 25% more likely than their less-diverse peers to deliver above-average profits, while ethnically diverse companies were 36% more likely^[3]**.

This could be for any number of reasons. When it comes to senior management, a diverse range of backgrounds and viewpoints can lead to healthy debate, stronger innovation and ultimately better decision-making. A management team that reflects the diverse nature of the company’s customer base may also offer a competitive advantage, as they can more easily keep abreast of societal trends.

Furthermore, an inclusive workplace may help to improve employee morale and attract the best talent, both of which can boost productivity. Finally, with diversity becoming growingly important to investors and the wider public, businesses that don’t take it seriously run the risk of reputational damage.

How investors can make an impact

Investors looking to promote diversity and inclusion can use the power of capital to help drive positive change. Here, we look at the approaches taken in the M&G (Lux) Diversity and Inclusion Fund.

Investing in companies with strong diversity credentials

The first option is to invest in companies that have demonstrated their commitment to diversity by hiring a diverse workforce. For example, in the M&G (Lux) Diversity and Inclusion Fund we dedicate the majority of the portfolio to companies with a minimum of 30% women and/or ethnic minority representation at board level, and with a high degree of diversity across wider leadership teams.

Expanding on this, we will examine a company’s processes and initiatives. For example, do they have a diversity strategy in place, are they reporting on their progress regularly and how do they support employees? This also gives us greater insight into other forms of diversity, aside from gender and ethnicity, which are being championed.

Investing in companies providing solutions

Another approach is to invest in companies that provide solutions to combat social inequality, by improving the reach of underserved or underrepresented people. They may serve a variety of areas, such as affordable housing, employment and education, healthcare or improved access to financial products. In the M&G (Lux) Diversity and Inclusion Fund, a portion of the portfolio is invested in companies that we deem to be making intentional, material and measurable positive impacts on society.

Using the power of engagement

Investors can use their position as shareholders to drive positive change by engaging with investee companies. For example, this could mean voting against the appointment of new board members, or encouraging management to adopt stricter diversity targets.

In the M&G (Lux) Diversity and Inclusion Fund we send diversity questionnaires to all investee companies annually. This helps to fill any gaps in the data disclosed in company annual reports, and allows us to ensure there are adequate diversity policies and practices in place behind the headline figures. We may also engage with investee companies if gender or ethnic diversity falls below 30% at board level, to understand the reasons why and encourage improvement.

M&G’s sustainable and impact funds

The M&G (Lux) Diversity and Inclusion Fund is one of several sustainable and impact equity funds managed by M&G. Each fund invests in companies demonstrating a specific positive impact or providing solutions to a particular challenge. The funds either invest across a broad range of social and environmental impact areas, or focus on a particular topic such as diversity and inclusion, climate or health.

Diversity and inclusion at M&G

Investment managers and other financial institutions can play an important role in improving diversity and inclusion. Not only by investing in companies that are promoting equality, and encouraging investee companies to improve in this area, but also by fostering inclusivity within their own organisations. This is something we take seriously at M&G – alongside climate change, it is a central theme of our sustainability strategy.

• We are committed to achieving greater representation of gender and ethnicity in our senior leadership (Executive Committee and their direct reports) with goals of achieving 40% female representation and 20% representation from BAME backgrounds by 2025. Currently, we are at 30% and 14% respectively. Alongside this we have committed to reducing our gender pay gap and report on this annually.
• Our various employee-led networks provide support, mentoring and empowerment for colleagues at all levels across genders, sexual orientation and cultural backgrounds.
• M&G has signed up to a range of external accreditations and partnerships, such as HM Treasury’s Women in Finance Charter, the National Equality Standard, LGBT Great and Black Women in Asset Management.
• We strive for annual improvements in employee inclusion and engagement, as measured through our One Voice survey, and have implemented additional policies to support employees, such as flexible working and progressive parental leave across genders.

The value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.

[1] Source: GOV.UK, Parker Review and Spencer Stuart S&P 500 Board Diversity Snapshot.

[2] Source: https://www.worldbank.org/en/topic/social-inclusion

[3] First quartile vs fourth quartile peer performance. Source: McKinsey & Co Diversity Wins Report.