The power of diversity and inclusion as an investment strategy

4 min read 6 May 22

Empowering human capital and addressing social inequality is increasingly being seen as a driver for business success as well as making a difference to people’s lives and livelihoods.  M&G Investments’ Thembeka Stemela Dagbo, manager of the M&G (Lux) Diversity and Inclusion Fund, talks to the Editor of IFA Magazine, Sue Whitbread about asset allocation and stock selection as well as why she believes the fund is ideally positioned to generate positive returns for investors as well as meeting stringent social, sustainable and impact goals. 

SW: What are the aims of the (Lux) M&G Diversity and Inclusion Fund and what are some of the high level challenges you’re facing within the asset allocation strategy?

TSD:  The M&G (Lux) Diversity and Inclusion Fund is a global equity strategy with a concentrated portfolio of 30-40 stocks aiming to provide a higher total return than that of the MSCI ACWI over any five-year period.

The fund is structured to invest in companies that we believe are demonstrating high levels of either gender or ethnic minority diversity, whilst also investing in companies that we believe have solutions that are helping to bring about social equality.

It's important that these companies have sound sustainability credentials, that they’re not just, perhaps, doing good in one area but then not doing that in another.

We recognise the fact that we can't think about diversity in isolation. We also need to think about some of the companies that are helping to bring about greater diversity in society by providing empowerment solutions as well. That's where the initial premise of the fund came from.

The key challenge we face is the general lack of diversity which exists within businesses today. Whilst some regions, such as the U.K., for instance, have made solid progress in improving gender representation at board level, the reality is, when you look more broadly and in different geographies, that starts to fall apart.  Within S&P 500 companies for example, we see significant under-representation of both women and ethnic minorities at the highest levels.

Our aim is to encourage companies to create management structures and workforces that are more representative of the societies that they serve.  We believe this is strategically important for these companies as the societies that they essentially serve continue to evolve. More women are becoming wealthy in their own right and are therefore able to contribute and consume more than they have in the past.

Greater numbers of people from ethnic minorities are also reaching the higher echelons of society, and they also need products and services that would serve them. It's about recognising that and recognising that there's also a competitive advantage to having greater and more diverse insights in the companies that essentially run the world.

That's what this fund is also aimed at, trying to resolve and encourage more diverse insights when thinking about investment decisions.

SW: How is the fund structured to meet those aims?

TSD: Given our aims regarding diversity and boosting social equality, the fund is really a hybrid of a sustainability fund as well as an impact fund. Interestingly, we find that there are opportunities for us to invest across most sectors and most geographies, which is so encouraging. For example, we found many companies in Africa that are providing solutions that help empower social inclusion within these societies, plus we see that a lot of their boards and management teams actually have high levels of gender diversity as well.

Within the sustainability arena, we recognise companies that not only have higher representation in terms of gender, ethnic minority in all their management levels, but also those with policies and processes that create more inclusive work environments. Essentially, we want to make sure that these companies in which we are looking to invest are actually ‘walking the talk’. Where they do so, they’ll probably maintain or even further enhance the levels of diversity they have.

For the ‘impact’ part of the portfolio, we're investing in companies that have products and services that are set up to cater to the underserved populations in society. That could be women, people with disabilities, ethnic minorities or underserved populations in emerging markets as examples.

By combining the impact element of diversity as well as the sustainability element, we encourage companies to become more diverse as they serve a more diverse and evolving set of customers.

SW: What assessment frameworks do you lean on when you invest within the fund?

TSD: We leverage a few different frameworks here.  For the diversity element, we have created a framework called an EQUAL score, where E stands for ESG, Q stands for quality etc.

This helps our company due diligence to identify companies with strong investment credentials with a quality bias. Companies must score above average for category in order to be included in our watch list and funds so we can make sound investments whilst honouring sustainability and impact mandates.

We also use the ‘Triple I’ (III) framework – used in M&G’s Positive Impact Fund too – to assess investment, intention and impact. Again, we want to ensure that not only are companies impactful and intentional about their impact, but that they also offer sound investment prospects as well.

The fund, which is supported by the M&G’s Stewardship & Sustainability team, also embraces the United Nations Sustainable Development Goals (SDG) framework. The fund maps each holding to its prime or dominant SDG, focusing on six key areas: Quality Education, Gender Equality, Decent work and Economic Growth, Industry, Innovation and Infrastructure, Reduced Inequalities and Peace, Justice and Strong Institutions.

In terms of the diversity companies, the most obvious ones are gender equality, as well as those bringing about reduced inequalities. Other SDGs related to health are important too, where companies may be providing affordable access to health care to underserved populations.  Other areas are companies helping to bring about greater access to infrastructure, better work and education.  

SW: How would you say the fund is differentiated?

TSD: In my experience, many funds that seek to invest in diversity tend to stop at board level representation, and consider mainly gender equality. Of course, this is extremely important but  there are other forms of diversity as well.

At M&G, we go beyond gender when thinking about diversity. We screen for both gender and ethnic minority diversity as well as more broadly in terms of the policies that are in place, the processes, the inclusive environments. We can therefore tap into other elements of diversity that are being championed and included within these companies as well.

Another point of differentiation is by adding that social inclusion element to the portfolio. We recognise that you really can't have diversity without inclusion and that one essentially aids the other.

By investing in companies that do just that, we gain the ability to invest in other geographies and also other sectors as well. This creates a better, more differentiated and effectively balanced portfolio whilst also serving our sustainability and impact mandates.

Finally, this is an Article Nine fund, which means that not only will we just have a financial objective, which is to outperform our benchmark over a five year period, but we also have a sustainability objective as well.  This is to bring about greater gender and ethnic minority diversity and also investing in companies that are bringing about social equality.

We will produce an annual report looking at how the companies we hold have actually fared compared to those objectives looking at key diversity and impact indicators at stock level, stating their absolute level as well as their year on year change.

I’d argue that doing this keeps us honest. It also keeps our companies honest and gives more transparency in how we're measuring and assessing diversity and inclusion.

SW: How important do you see the aspect of social investing in ESG and impact investing?

TSD: It’s very important – although it’s not always recognised as such. When we think about ESG, the industry has typically embraced the emphasis on climate, the environment as well as the governance element.

However, in reality, I think that what often becomes neglected when we think about that whole picture is that climate and the environment and the social elements essentially work together.

Being realistic, climate change disproportionately impacts women and ethnic minorities. You've also seen a significant funding gap emerge to the tune of about $100 trillion since the Covid-19 pandemic started, with a lot of social factors being particularly neglected within this realm.

If we know that most of society, or the half of society which are women, are being excluded from from climate-related elements or not being able to participate meaningfully in the debates, in policies and in the execution of those policies, we're really excluding half of the population of the global economy from these important elements.

Developing countries too tend to be the most impacted as well by climate change.  So, if half or more of the world is being excluded in these policies because they don't have access to infrastructure, because they don't have tools to help empower them and improve their livelihoods, the reality is we are actually not going to make much progress towards achieving the  UN’s SDGs as a whole. These are intertwined and they should be taken into account equally. Within ESG, this is also an essential part of the change that is needed and why I believe the investment community needs to take a closer look at investing in those in those social investment themes as well.

SW: Looking to the future, are you excited about where things are going with D&I or do you feel daunted by seeing there’s still a long way to go?

TSD: Actually, I think it's both. I am encouraged that companies are becoming even more aware of the genuine benefits of improving their levels of diversity. There have been various studies which have shown the solid outperformance of companies that tend to be more diverse, such as McKinsey's Diversity Wins report and also Refinitiv has produced a report indicating solid outperformance from companies that have great a diversity of board and an executive level. I think that such reports are essentially making the investment community wake up a bit to see that there actually could be benefits. Strategically of course, D&I is not just a ‘nice to have, it really makes good business sense, which is extremely encouraging.

I think increased regulatory support as well is always a good thing. With the recent announcement from the FCA that they are further enhancing their requirements for UK companies in this regard, I think it’s definitely going to have an impact. It should also make measuring how these companies are performing so much easier.

However, there is still a long way to go. We still see significant under-representation of both women and ethnic minorities at the highest level of society and also the highest level of industry. That's something that might take a while to unwind.

I think it's important that companies invest meaningfully and also take a more long-term view to resolving this problem. Instead of just window dressing and making a certain board look a certain way, they need to create environments and implement policies that can allow such change to occur more organically. Here, I think there's a lot more room for improvement. However, I'm optimistic that companies are becoming more galvanised in recognising the need to – and benefits of -investing more meaningfully in those areas as well. It’s a very exciting sector to work in and I’m confident that we are very well placed to continue to build on our success here at M&G, and to deliver for our investors over the longer term whilst achieving our sustainability and impact goals into the bargain.

About Thembeka Stemela Dagbo

Thembeka Stemela joined M&G in July 2018 as an investment analyst for the Positive Impact strategy. She was appointed deputy manager in August 2019, and became manager of the Diversity and Inclusion strategy in October 2021. Before joining M&G, Thembeka was a vice president (VP) in the equity research department at Credit Suisse International, where she joined as part of the Graduate Programme in 2012. She served as a primary analyst for the UK and Nordic non-life insurers in Credit Suisse’s European insurance team. Thembeka has a Bachelor of Business Science Honours Degree from the University of Cape Town (UCT), specialising in Economics.

By Thembeka Stemela Dagbo

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