Diversity & Inclusion Yields Better Financial Performance

In the past decade, environmental, social and governance (ESG) values have become increasingly important for businesses globally. Early on, financial firms were slow to define an ESG strategy. It seems they were not convinced that being ESG-conscious would help drive higher returns. But that’s no longer the case.

The financial services sector responds to data. And the data is finally available through Refinitiv’s Diversity & Inclusion (D&I) Index that ranks over 7,000 companies to identify the top 100 most diverse and inclusive publicly traded companies. The index’s findings show the correlation between diversity and inclusion in the workforce and superior financial results.

Several recent studies have demonstrated this outcome, such as a research study of more than 3,000 companies in 56 countries by Credit Suisse. It showed that for firms where more than 20 percent of the top managers are women share prices rose more over the past decade than the shares of other companies. Diversity and inclusion clearly matter and the financial services industry is responding accordingly:

Transparency is essential for change

Companies are now taking the call for more diversity and inclusion actively. The Refinitiv ESG database highlights that a growing number of firms are reporting on the gender and cultural diversity of their boards of directors. However, while in 2017 almost all companies (98 percent) reported on gender diversity, the figure for cultural diversity still has a way to go, lagging at only 31 percent.

The database has also uncovered a significant trend in terms of gender diversity. In the last five years, the number of companies reporting on gender diversity on their boards has increased 64 percent. In contrast, the number of females on boards has increased by 47 percent.

What seems to be key to changing the environment is transparency. As investors increasingly want to work with more D&I-aware companies, it’s important to see all the issues at hand. Consistent, transparent reporting will lead to standardization and increased adoption of ESG investing. While Refinitiv’s D&I Index looks at a wide range of criteria when determining a company’s level of diversity and inclusion, more transparency around data can only help investors with their financial decisions.

Investors are demanding D&I

With investors looking for more gender inclusiveness and diversity, change is happening. In a clear sign, in October 2018 California passed a law requiring publicly-traded companies based in the state to include at least one woman on their boards by the end of 2019. This number is set to increase by 2021. Investors are seeking higher standards from the companies they are interested in. And as wealth shifts to millennials who want to be sure they are working with companies they respect and have the right values, ESG strategies are only expected to grow in popularity.

The impact of D&I on investment performance is evident. According to Morgan Stanley research from 2016, more females in the workforce correlates with higher average returns. When Morgan’s quantitative team looked at companies based on their metrics of gender diversity, the top third experienced 2 percent higher average relative returns than their peers. Over a six-year period, more gender-diverse companies enjoyed a one-year return on equity that was 1.1 percent better than firms with less female representation. Research has also linked gender diversity to lower return-on-equity volatility.

Based on such studies, wealth management firms are no longer standing on the sidelines, but rather taking action that is proven to yield returns. The Matterhorn Group is one. As a wealth manager making investment decisions on behalf of individuals, families and non-profits, about seven years ago the group started researching diversity. It found that companies with more women on their boards outperformed others with fewer female board members.

As a result, the group launched its gender parity investment strategy. Focusing on brand name companies, the strategy only considers a firm as an investment which has a minimum of three women on its board or three women who are key executives. A key element in implementing the strategy is the D&I Index, which makes The Matterhorn Group the first advisory team to use the index as an investment tool.

On the other side of the fence, TD Bank is one of many companies that has recognized how D&I can improve its financial performance and hence attractiveness to investors. As a result, it has implemented its vision to be the bank of choice for women from a colleague perspective as well as a customer perspective. TD works hard to recruit, develop and retain women at all levels and make sure they are engaged and recognized in all roles. The metrics show the company is succeeding.

TD Bank is doing a solid job closing the gender equity gap and outperforms most rivals in the sector when it comes to diversity and inclusion. On the consumer side, the bank also works hard to be female-centric with everything from small business loans to wealth management products. For these reasons, the company consistently has a high standing on the D&I index.

Strong D&I, Strong results

As Refinitiv strives to ensure businesses understand the positive impact of D&I on their financial performance, the company is steadfast in practicing what it preaches. “Refinitiv is not above its own findings,” says Audrey Campbell, head of diversity and inclusion. “Our own D&I practices are important to help us create a competitive advantage for our customers.”

Refinitiv’s leadership is on target to be 40 percent women in the coming months, with a similar target in ethnicity in the firm’s leadership by December 2020. For Refinitiv and its growing number of adherents in the financial services community, the bottom line is diversity and inclusion initiatives deliver better results – for both your company and your investors.