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Investing in Diversity: analysing the investment risks and opportunities

There is growing evidence to support the argument that diversity within the workplace is good for business.

Olivia Gull

Olivia Gull

Responsible Investment and Governance Analyst

Nov 20, 2020
14 minute read

Key takeaways:

  • Companies are increasingly being held accountable by consumers who reward brands aligned with their values.
  • For many global businesses, matters of diversity and inclusion go beyond the workplace, and efforts are made to address discrimination in the countries in which they operate.
  • Investors should be wary of companies that fail to futureproof themselves in terms of diversity. Socially conscious brands that make inclusivity a central part of their business strategy and brand ethos are more likely to succeed.
  • What gets measured, gets improved. Investors should focus on company disclosure, diversity-related targets, and meaningful initiatives in place. A list of suggested investor questions can be found at the end of this paper.

Reports from Credit Suisse1, Exane2, and Morgan Stanley3 all find a positive correlation between employee diversity and company share price performance. McKinsey4 and BCG5 studies also show that diverse leadership teams are more likely to outperform on profitability and value creation. There is growing demand for gender-equality investment bonds as well as diversity indices and a greater focus on ‘gender-lens’ investment products, which consider the positive and negative impact of financial investments on women and girls.

So, how should investors start thinking about diversity in their portfolio and what metrics are the most meaningful? As data providers try to fill the diversity vacuum with relevant environmental, social and governance (ESG) data – Bloomberg currently offers 77 diversity-related fields, most of which are unpopulated – it is difficult to know what to look for and where to look for it.

Moving past board diversity

Over the past few years, investors and regulators have focused on board diversity as a useful metric to analyse companies. Soft laws and regulations regarding female board representation have increased across the world and US states including California and New Jersey have passed bills respectively.7 Against this backdrop, the pressure on boards to diversify has increased and more investors are voting in favour of diversity-related shareholder proposals.

Subsequently, all-male boards are moving towards extinction with only a handful left across companies that are constituents of the FTSE 350 Index in the UK10 and the ASX200 in Australia.11 Japanese companies are lagging behind peers with only 70.7% of companies on the Nikkei 225 and 77.2% of companies on the Topix 100 Index listed having women on their boards in 2019. In addition, only one company among both indexes, which make up Japan’s largest companies by market capitalisation, had more than 30% female directors12.

Harassment hurts performance

Media coverage on workplace culture and inclusion is continuing to rise and is a growing reputational risk to companies. Harassment scandals have led to a number of CEO and executive resignations at a wide range of high-profile companies. The responses from these companies have differed; some have taken full responsibility, some have vowed to implement better systems, and some have refreshed management. How a company responds to these allegations provides investors with insight into whether human capital and an inclusive culture is a priority for senior management.

Although anti-harassment policies do not represent how the policy is enforced and therefore should not be used as a proxy for good governance, they can be a good starting point for discussion. Investors can engage with companies to understand: how complaints are dealt with (what channels are in place to report issues and what level of management deals with these complaints); if there are comprehensive diversity, anti-harassment and human rights policies that mention certain committees, employee forums or governance structures; or if the whistleblowing hotline is regularly used and whether management can provide any examples.

Certain sectors are more vulnerable to harassment exposés, including male-dominated industries that have a historically reported ‘lad-culture’, such as the technology or finance sector. Sectors with a predominantly low-paid female workforce, including the hospitality, retail and restaurant industry, are also at risk. The Glassdoor website, which allows current and former employees to anonymously review companies, is a useful tool for investors to sense-check whether culture issues are consistently raised by employees online. Companies that struggle to change this corporate culture may find it difficult to attract and retain talent at their firm, and it may be a symptom of a wider systemic cultural problem.

An indicator of corporate culture

Adding new board members who are a different race, gender, or professional background is a good first step. However, an organisation with a deeply established closed-minded culture will not reap the benefits of a change in board composition. Diversity is only beneficial when an organisation has a culture that welcomes diverse opinions and encourages challenge.

It is therefore important for investors to look at diversity as part of a broad range of indicators that reflect a company’s culture. An example of this might be a company that puts policies in place to help disadvantaged members of society long before they are legally required to do so. If an organisation develops independent thinking based on its own beliefs regarding diversity, it may have the ability to stay ahead of the crowd on other matters.

Oil and gas company BP has gone a step further than the required UK gender pay gap reporting and has committed to voluntarily report on the company’s ethnicity pay gap by 2022. The company has set specific goals of increasing ethnically diverse representation across all levels of the business, is partnering with racially diverse institutions and from January 2021 will be providing focused “development interventions to support career progress for UK black employees and other underrepresented ethnic ‎minorities”.26

Global standards that go beyond the office

Diversity is especially important for companies with a global reach. A global understanding will become even more crucial for large US and European firms as market growth is expected to come from Asia and Africa. As an organisation becomes international, shaking off stereotypes and cultural biases is helped by building a team with diverse leaders. The growth in international CEOs is being seen across the US technology sector with leaders such as Satya Nadella (Microsoft), and Sundar Pichai (Alphabet).

Diversity in design

Diversity in product design is also an area for investors to interrogate in order to understand whether a business is considering all users. Women account for a large portion of consumer spending and are decision makers across many different product categories. Lack of gender awareness in the product development cycle could reduce market access to over half the population. Often women are excluded from product design, which can lead to ‘gender-neutral’ products being biased towards men. According to author Caroline Perez in her book “Invisible Women: Exposing Data Bias in a World Designed for Men”, this is especially true in the technology industry where wearables do not fit on women’s bodies, speech recognition software is 70% more likely to recognise male speech and Apple’s health-monitoring system initially failed to include women’s health.

Consumer demand for value driven companies

The issue of diversity has come to the fore during the rise of conscious consumerism. Companies are increasingly being held accountable by consumers who reward brands aligned with their values. Social media has intensified consumer access to information and made it easier to coordinate efforts to push for organisational change.35 There is an increasing expectation for brands to challenge stereotypes, to take active positions on social issues, to set internal policies that reflect these values across the business, and for senior executives to be held accountable when things go wrong.

Futureproof or failure

Nearly all of L Brands’ top leadership is male, with only one woman in a senior brand leadership position as at September 2020.38 This raises the question of whether retail and/or consumer discretionary companies can survive without a strong culture of diverse employees, and whether it is sustainable to be targeting a certain cohort without that cohort in strategic decision-making power.39 Consumers increasingly want to think that the products they use and the companies they buy from represent them. Socially conscious brands that make inclusivity a central part of their business strategy and brand ethos are therefore likely to succeed.

What gets measured gets improved

Implementing best practices regarding diversity is a good indicator of a strong and adaptable company culture. There are a number of signals that investors can look out for including:

  • Disclosure: Diversity data is being disclosed at a rapid rate and, in terms of ESG data, it is considered one of the most publicly available numeric metrics, even above greenhouse gas emissions. The more a company discloses around gender pay gap and diversity at different management levels, the more investors can understand best practice and monitor improvements. Whether it is encouraging further transparency at executive, management or firmwide level, disclosure is the best starting point for investors who want to engage on diversity.
  • Goal setting and/or pipelines:More companies are setting diversity related targets, some even tying executive bonuses to diversity goals (Microsoft and Intel both have diversity as a strategic performance goal determining 50% of executives’ annual cash incentive. Other examples include Facebook, Johnson & Johnson, and Uber).42 Although diversity performance goals keep management strongly incentivised, any measurable objective where progress is tracked and reported is a positive indicator. The most successful companies develop a pipeline of talent throughout the entire organisation, regularly assessing a succession plan and monitoring the turnover/retention rates of diverse candidates.
  • Meaningful initiatives: If management can provide meaningful examples of initiatives in place, it provides insight into the governance structures around diversity and level of buy-in from the top. Do employees take their paternity leave? Is flexible working encouraged? Are there mentorship programmes in place? What employee training is mandatory and how is this impact measured? Is there a Diversity & Inclusion committee and what is the reporting structure and objectives of the committee?
  • How are issues managed? Many companies have been in the news regarding employee walkouts, scandals resulting in litigation, or general negative media coverage regarding gender/racial discrimination. How management deal with the issue will potentially tell investors more than the issue itself. Is management reacting with denial and excuses using more capital expenditure to dig a bigger hole? How fast is the acceptance of the issue and the plan to turn it around? How engaged is the company with shareholders on these issues?
  • Design: Diversity in design is important across most sectors that are designing products and services to be used by both genders and/or a diverse market. How diverse are the individuals that are part of the product development cycle? Are there any women in the design team? Who is represented in demos and prototypes? Has data been broken down by gender/ethnicity? How diverse is the reviewing panel? How is feedback collected, and is it anonymous?43
  • Tone from the top: pioneering versus laggard? What is management’s position on certain social issues and is this aligned to the company’s core values? What pioneering initiatives has the company established regarding diversity before being legally required to do so? For example, providing additional transparency and disclosure, having innovative diversity programmes, proactively focusing on diversity issues aside from gender and taking meaningful action, signing up to initiatives that hold the company accountable.
  • How is a business supporting its workers inside and outside the business? What is the impact on the broader community regarding gender/racial/LGBTQ+ issues? If the company operates in an underprivileged community, are apprenticeships and other opportunities offered to local people? Are social mobility programmes in place? Are non-discrimination policies global? If businesses have operations in countries where LGBTQ+ or other discrimination is prevalent, are management implementing global non-discrimination practices and are they being vocal about social issues that impact their employee base?
  • Action behind words: If the company has made statements supporting broader social movements, such as Black Lives Matter or #MeToo, has this support been reflected within the business? Has the company faced backlash for hypocrisy by employees/consumers? Are lobbying practices in line with press statements supporting these disadvantaged groups?

The conversation around diversity and inclusion is an evolving one, and companies that are on the forefront of change should be seen in a positive light. There will continue to be growing regulatory pressure as well as shifting social expectations around what is considered best practice. Companies that are seen to embrace diversity may find it easier to retain exceptional talent, have a more productive workforce and ultimately outperform less diverse peers on profitability. Investors should therefore continue to monitor this theme and engage with companies to help them navigate this changing landscape.


1 Credit Suisse Research Institute; September 2016; The CS gender 3000: The Reward for Change

2] Hugo Dubourg; 9 August 2019; Exane BNP Paribas; More than a Woman 2019

3 Morgan Stanley; Jaiwish Nolan, Boris Lerner, Jessica Alsford CFA, Mark Savino, Diane Ding Ph.D., Michelle M. Weaver; 12 August 2019;  Introducing HERS: Employing Diversity Pays Off

4 McKinsey & Company; Vivian Hunt, Sara Prince, Kevin Dolan and Sundiatu Dixon-Fyle; May 2020; Diversity wins: How inclusion matters

5 Boston Consulting Group; Rocío Lorenzo, Nicole Voigt, Miki Tsusaka, Matt Krentz, and Katie Abouzahr; 23 January 2018; How Diverse Leadership Teams Boost Innovation

6 Coburn Ventures; July 2017; Discovering Cultural Advantage Version 2.0.

7 Hugo Dubourg; 9 August 2019; Exane BNP Paribas; More than a Woman 2019

8 Jeffrey Karpf, Sandra Flow, and Mandeep Kalra, Cleary Gottlieb Steen & Hamilton LLP, 28 January 2020: Harvard Law School Forum on Corporate Governance: Board Composition and Shareholder Proposals

9 Carmen Reinicke, Jan. 23, 2020; Goldman Sachs will stop doing IPOs for companies without at least one ‘diverse’ board member starting in July

10 Daniel Thomas, Attracta Mooney and Alice Hancock, All-male boards return to FTSE in setback to diversity efforts, 19 June 2020

11 Jessie Tu, Last all-male board ends on the S&P 500. But there are still 4 on the ASX 200, 20 August 2019

12 Spencer Stuart, 2019 Japan Spencer Stuart Board Index

13 Sir John Parker, The Parker Review Committee; 5 February 2020; Ethnic Diversity Enriching Business Leadership: An update report from The Parker Review

14Kate Hilder, Mark Standen, 20 May 2020, (Slightly) less male, but still stubbornly pale and stale?

15 Spencer Stuart; 2019; 2019 U.S. Spencer Stuart Board Index

16 Business Standard, 10 September 2020, Black Lives Matter: Firms pledge to add at least 1 Black director to board

17 CBI, 01 October 2020, British businesses to launch new campaign aimed at increasing racial and ethnic participation in senior leadership

18 McKinsey & Company; Vivian Hunt, Sara Prince, Kevin Dolan and Sundiatu Dixon-Fyle; May 2020; Diversity wins: How inclusion matters

19 Taffy Brodesser-Akner, 23 April 2019, New York Times Magazine: The Company That Sells Love to America Had a Dark Secret

20 Samantha Cooney; 2 February 2018, Companies Are Losing Millions After #MeToo Allegations Like Kate Upton’s Claim Against Guess’ Paul Marciano

21 Lucinda Shen; 29 January 2018, Wynn Resorts Loses $3.5 Billion After Sexual Harassment Allegations Surface About Steve Wynn

22 Brooks Barnes, 10 May 2017, The New York Times: Fox Reveals Cost of Sexual Harassment Allegations: $45 Million

23 Au, Shiu-Yik, 2 September 2019; The real cost of workplace sexual harassment to businesses. (Based on paper by Au, Shiu-Yik  and Dong, Ming and Tremblay, Andreanne, How Much Does Workplace Sexual Harassment Hurt Firm Value? (June 4, 2020).

24 Severn Trent Water, 24 September 2020, Severn Trent named top FTSE firm for female representation

25 Severn Trent Water; Sustainability

26Adam McCulloch; 27 August 2020; BP fuels diversity and inclusion drive

27 Human Rights Watch: LGBT Rights, #Outlawed “The Love That Dare Not Speak Its Name”

28 Jon Miller and Lucy Parker; 24 January 2018; Open For Business: Strengthening the economic case

29 M.V. Lee Badgett; Laura E. Durso; Angeliki Kastanis; Christy Mallory: May 2013; The Business Impact of LGBT-Supportive Workplace Policies

30 The Economic times, 09 December 2019, Tata Steel asks LGBTQ+ employees to declare partners, avail HR benefits

31 Patrick Hoge; 14 June 2018; For Salesforce, equality is at the center of everything (Video)

32 Caroline Criado Perez; 2019; Invisible Women: Exposing Data Bias in a World Designed for Men pp. 146-191.

33 Glenn Gow; 23 June 2020; Why Are Technology Companies Quitting Facial Recognition?

34 Robert Iger, 2019; The Ride of a Lifetime: Lessons in Creative leadership from 15 Years pp169-172.

35 Anjali Lai; 23 May 2018; Millennials Call For Values-Driven Companies, But They’re Not The Only Ones Interested

36 Kari Paul; 24 June 2020; Online harassment increases to 35% for American minority groups

37 Mary Hanbury, 05 March 2019, An activist shareholder is urging Victoria’s Secret parent to update ‘tone-deaf’ brand image to boost sales

38 Cara Salpini, 12 October 2020, Bras and BB cream: Why aren’t brands for women run by them?

39 MSCI ESG Now Podcast, Episode 38, The ESG Weekly: Walmart’s CEO gets called out in the gun debate, and L Brands CMO resigns amid company turmoil on the week of August 5, 8 August 2019

40 Shelley E. Kohan; 28 June 2020; AEO’s Aerie Brand, Built On Body Positivity And Inclusion, Is Slowly Edging Out Sexy Supermodel Juggernaut Victoria’s Secret

41 Sarah Kim; 31 January 2020; Aerie Continues To Include Authentic Disability Representation – Ali Stroker Joins #AerieREAL Role Model Family

42 Jingcong Zhao, These Companies Are Tying Executive Bonuses To Diversity Goals, 07 March 2019

43 Gayna Williams; December 2013; The Business Of Gender: Is Your Product Gender-Neutral?


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