In my July column, I explored how investors can advance racial justice in their portfolios and positioned 2020 as a moment for action. I am pleased to report that we have seen a tremendous amount of action in support of diversity and inclusion (D&I) in Canada’s investment industry since then.
Institutional investors managing over $2.3 trillion in assets have signed the Canadian Investor Statement on Diversity & Inclusion – a pledge for investors to promote D&I within their portfolios and their institutions. Canada’s investment industry is also preparing for its inaugural Diversity & Inclusion Week – a week of thought leadership and insights for investment professionals to promote D&I in their portfolios and their organizations.
Despite these major industry developments, our analytics from social media, virtual events and other channels suggest that many investment professionals support D&I on a personal level, but some don’t yet recognize its importance from an investment perspective.
Here are four concrete reasons why D&I is important for investment management:
1. Diversity + inclusion = more talent
Diverse companies with inclusive cultures tend to attract and retain a wider pool of talent. Indeed, there is compelling research to back this up.
In its 2018 Millennial Survey, Deloitte found that millennials, the largest generation in the workforce, believe that diverse companies are more attractive places to work. The survey of over 10,000 millennials found that those who work for diverse companies are more likely than their peers to say their employers offer motivating, innovative and creative workplaces. In addition, respondents who work for diverse companies reported having more opportunities for talent development — an important consideration for many.
But perhaps the most striking data point from the Deloitte survey relates to retention: Over two-thirds of respondents working with diverse companies said they would stay with their current employer beyond five years, compared to just a quarter of those working with non-diverse employers.
A 2019 report from Catalyst provides additional insight. In a survey of over 700 people of colour working in corporate Canada, 61% of respondents who said they feel highly “on guard” against bias in their workplace were thinking about quitting, compared to only 31% of those who feel less on guard. In other words, those who regularly anticipate bias in the workplace are twice as likely to be on the lookout for better opportunities.
The data make it clear: More diverse and inclusive companies are positioned to attract and retain a wider pool of talent, while less diverse and inclusive companies may be more exposed to risks associated with talent flight and costly turnover, both of which can impact a company’s bottom line.
2. Diversity fosters innovation and resilience
Those millennials noted in the Deloitte survey are really on to something, as there is evidence to support their view that diverse companies are more innovative.
A 2018 Boston Consulting Group (BCG) study found a strong and statistically significant correlation between the diversity of management teams and overall company innovation. Companies with above-average diversity in leadership generated 45% of their total revenues from innovation, while their less-diverse peers saw just 26% of revenue coming from innovation.
In other words, nearly half the revenue of companies with diverse leadership comes from products and services launched in the past three years. In an increasingly complex and volatile business environment, that level of supercharged innovation puts these companies in a better position to quickly adapt to changes in the market. It makes them more resilient.
3. Diverse and inclusive companies perform better financially
There is a growing mountain of evidence showing that D&I is correlated with financial outperformance. In the BCG study noted above, companies with more diverse leadership teams reported 9% higher earnings before interest and tax margins than their less diverse peers.
In 2020, McKinsey found that companies with the highest levels of gender diversity on executive teams were 25% more likely to have above-average profitability than male-dominated firms, while the most ethnically and culturally diverse companies were 36% more likely than their less-diverse peers to outperform in terms of profitability.
The Centre for International Governance Innovation analyzed data from over 143,000 employees at 7,900 Canadian workplaces to find that a 1% increase in ethnocultural diversity is correlated with a 2.4% increase in revenue and a 0.5% gain in workplace productivity. Academic research has also found that companies with policies that are supportive of LGBTQ employees tend to see higher productivity and profitability.
There is clearly a strong financial case in favour of D&I.
4. Investors want D&I in their portfolios
Perhaps the most compelling reason for advisors to make D&I part of their conversations with clients is that clients simply want D&I in their portfolios. The forthcoming 2020 RIA Investor Opinion Survey, scheduled for release on October 22, provides clear evidence to support this.
The survey, which is based on Ipsos data collected from 1,000 Canadian retail investors, found that 73% of respondents somewhat or strongly agreed that they would like a portion of their portfolio to be invested in organizations that are providing opportunities for the advancement of women and diverse groups. Similarly, the survey also found that 72% of respondents want their fund manager to engage with Canadian corporations to encourage more diversity in corporate leadership.
In short, about three out of four Canadian investors want exposure to diverse and inclusive companies, and they want to be invested in funds that are engaging with portfolio companies on D&I.
As a business leader, I am often in a situation where I’m not sure what path to follow. In such circumstances, I usually gain the most valuable insights from looking at the data and listening to my market. When it comes to diversity and inclusion in investment management, the data and market sentiment could not be much clearer.