Beyond politics: Unlocking the value of diversity and inclusion

There has been growing pushback against diversity, equity and inclusion (DEI) initiatives in recent years, culminating most recently with the actions of the second Trump administration in the US. We have seen fewer or watered-down DEI commitments from some companies, due to concerns about straining relationships with the current administration.

However, others have remained committed to improving diversity, as they appreciate the potential it brings to better execute their strategic goals, as consumer and employee needs continue to evolve. They share our belief that, rather than compromising merit, fostering a diverse and inclusive working environment can enhance long-term company performance.

The economic cost of exclusion

There are plentiful statistics about investors forgoing significant returns by pulling out of the market during times of turbulence, inadvertently missing some of the best performance days. But taking a step back, is it possible that the market itself has missed out on considerable gains by virtue of exclusion?

“Between 1990 and 2019, gender and ethnic disparity cost the US economy more than $70 trillion.”
 

Research suggests that between 1990 and 2019, gender and ethnic disparity cost the US economy more than $70 trillion¹. That’s more than double the size of the current US economy², and enough to wipe out the US deficit dozens of times over. In 2019 alone, eliminating the race and gender gaps in labour market opportunities would have boosted economic output by $2.6 trillion³.

The economic effects of exclusion can manifest in different ways. It can lead to a poor education, the loss of wages, and negative employment outcomes. But exclusion – or the perception of exclusion – can also lead certain groups to opt out of markets, services or places, creating losses for both individuals and the economy.

Keeping up with changing demographics 

A number of demographic shifts are currently underway. The US is expected to become more racially and ethnically diverse over the coming decades, with the white population falling below 50% by the year 2060⁴. 

Women are forecast to control or influence 75% of discretionary spending by 2028⁵, and to control 38% of investible assets in the US by 2030 (up from 29% a decade ago)⁶. These shifts are creating opportunities for forward-thinking companies, and presenting risks for those that are unable or unwilling to keep up with changing demographics.

Diversity is good for financial performance

Despite recent improvements, gender and ethnic minority representation at board and senior management levels remain low. In the US, 13% of S&P 500 CEOs are racially or ethnically diverse⁷ and 10% are women⁸. In the UK’s FTSE 100 index, 12% of CEOs are ethnically diverse⁹, while 9% are women¹⁰. At board level the trends are better, with female representation sitting at 34% on the S&P 500¹¹, and 45% on the FTSE 100¹². This indicates that while progress has been made at the top level of industry, there is still more work to do at management and workforce level.

However, research has shown that good gender and ethnicity diversity representation increases the likelihood of companies financially outperforming their less-diverse peers by up to 36%¹³. Diverse perspectives can lead to better decision-making, while also reflecting the changing consumer patterns mentioned above. A focus on improving diversity can also give companies the potential to tap into previously underrepresented talent pools. 

Outperformance of diverse companies versus less diverse peers (1st vs 4th Quartile)

Source: McKinsey & Company, ‘Diversity wins’, (mckinsey.com), May 2020. Past performance is not a guide to future performance. 

Beyond the statistics

It must be said that good DEI goes beyond representation statistics. In fact, a myopic focus on the numbers can lead to a host of issues.

For example, opportunities being given to a select few, and a risk of over-boarding, where directors are unable to commit sufficient time or attention to the company. Indeed, women are almost twice as likely to sit on 3 or more boards compared to men. It also fails to consider other forms of diversity, such as socioeconomic or cognitive, or measure how diversity is flowing through into the wider workforce.

Instead, good DEI also means sufficient policies, procedures and employee benefits to promote an inclusive workplace for all – from flexible working and parental leave to childcare and fertility treatment. In fact, aside from their merits for promoting diverse and inclusive workplaces, DEI benefits have become powerful tools for attracting and retaining the best talent. They impact all employees, not just those from under-represented groups. 

For instance, gender-neutral or shared parental leave is beneficial to all employees undertaking familial responsibilities in the home. Improved fertility benefits are positive for both female and male employees (and their partners), and for same-sex couples aiming to start or expand their families.

Our approach: Combining diversity and inclusion 

At M&G Investments we run a diversity and inclusion-focused public equity strategy, which takes a two-pronged approach. It aims to invest in companies demonstrating a commitment to diversity leadership through their diversity representation, policies and processes. The strategy also seeks companies providing solutions to combat social inequality and improve the reach of underserved or underrepresented groups. We believe that diversity cannot be attained without inclusion, and that one essentially aids the other. This is why the investment process combines both.