The Responsible Investor

Diversity and Inclusion in Investing

Between a global pandemic that has cost trillions of dollars and witnessing protests against police brutality, this year has triggered many current events that are reshaping how we view the world. People of all races are starting to ask the tough questions about racial equality that many people may not want to discuss. Many investors are starting to figure out how they can position their investment portfolio to align their money with their values on racial equality.

Socially Responsible Investing (SRI) has been growing in popularity over the last decade. An increasing number of asset management firms are creating funds that either tilt towards companies that show a higher degree of diversity and inclusion among their workforce and boards, or are creating funds that exclude companies that don’t exhibit this type of diversity. Data is currently available that supports that having an equity portfolio that consists of companies that take diversity and inclusion seriously can actually boost performance. For instance, research from the Wharton School at the University of Pennsylvania showed that a value-weighted portfolio of Fortune’s list of best companies to work for based on opportunities, benefits, and diversity generated an alpha of 3.5% in the twenty-five years from 1984 to 2009, which was 2.1% higher than the benchmark.1

How can you implement a portfolio that supports racial diversity and inclusion in the workforce? All investors have the ability to invest in mutual funds and exchange traded funds (ETFs) that invest in companies that have high Environmental, Social, and Governance (ESG) scores. A limitation with SRI funds is that they are meant to be a “one-size-fits-all” option for socially-conscious investors. People’s values are inherently different, and so are their socially responsible investment preferences. An option for investors with larger portfolios is to own individual stocks that exhibit the investor’s socially conscious values. Owning individual stocks allows for more customization and offers the opportunity for investors to directly invest in companies that are more racially diverse or specifically exclude investing in companies that don’t exhibit diversity and inclusion. Many investors use separately managed accounts to get professional management.

When you own individual stocks, you also have the opportunity for shareholder engagement. One of the ways that shareholders can advocate for social change is through proxy voting. Proxy voting is when a shareholder votes on decisions that will be discussed at the company’s annual shareholder meeting. A more proactive form of advocacy would be filing shareholder resolutions. Shareholder resolutions are brought forth by shareholders and are used to drive change in a company’s policies or business practices. For example, in 2019, shareholders of Fastenal filed a resolution to have the board of directors issue a report to shareholders on the diversity of the workforce in order to hold the company accountable for hiring diverse individuals.

2020 could be a defining year in history as it relates to race relations in America. Please reach out to your financial advisor if you’d like to learn more about implementing an investment strategy that takes racial diversity and inclusion into account. For more information on racial diversity, see our handout on the United Nations Sustainable Development Goal 10

References

1. Edmans, A (2011). Does the stock market fully value intangibles? Employee satisfaction and equity prices. Journal of Financial Economics, 101, 621-640.

 

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