Following the Covid-19 pandemic and societal unrest, investors are beginning to recognise a systemic risk which threatens the long term returns from their investments: diversity.
The days of being able to depend on a solid product offering and quality customer service to attract investors are over. Today’s consumers and employees are using their pocketbooks to drive social change. From deciding where to work, to choosing which product to buy, people of all ages now place purpose higher on the chart than profit.
Investors will do well to heed this change and factor it into their investment choices. However, those who simply view diversity and inclusion commitments as a risk mitigation strategy are missing an opportunity to increase their returns. The business case for an investor-led diversity movement will open up new opportunities for future growth. When reviewing the consumer and employer benefits of diversity commitment and action, the commercial benefits are crystal clear.
The Consumer Benefits of Diversity
In a 2013 research study, Global Strategy Group found that only 44% of respondents thought corporations should stand up for their political beliefs. By 2018, that number had jumped to 81%. Consumers are now looking for vocal commitments and recognisable actions before making their purchase choices.
The why behind this shift is tied directly to changes within our population. Virginia Lennon, Ipsos senior VP of the Multicultural Center for Excellence and one of the lead researchers on a 2019 study conducted by The Female Quotient, in partnership with Google and Ipsos, explained, “We now have generations of consumers who are increasingly multicultural through the intersectionality of race, gender, ethnicity, and sexual orientation. This study clearly told us that these consumers expect brands to be inclusive and reflect the reality of their lives in advertising.”
The Harvard Business Review examined the question of diversity and racial injustice in a recent article, outlining a framework for assessing a company’s authenticity when speaking to the topic. As to the question of why standing up for racial justice matters, the article quoted a June 2020 survey by YPulse which found that 69% of Millennial and Gen Z consumers think brands should be actively involved in the BLM movement. The authors stated, “To connect with these younger consumers, brands need to take a stand against racial injustice in a way that is authentic to the corporation as well as their customers.”
The commitment, however, must reach below the surface. Thanks to the internet and social media, consumers have ready access to corporate information, employee reviews on sites such as Glassdoor, and customer reviews, and they don’t hesitate to look deeper before making their purchase decision. Equally, companies who aim to attract diverse customers without bringing diversity into their planning room find their products and ads either fall flat, or fail noticeably. Del Johnson, a principal at Backstage Capital, stated, “The more distance there is culturally between your team and the market, the less ability you will have to execute. We all fall into particular biases. That’s why you need to have culturally competent people in the room who have the power to affect decisions. By bringing in the talents of those who have traditionally been overlooked, you unlock true creative expression — and build an organisation able to check its biases.”
The Employer Benefits of Diversity
Engaged employees consistently perform better, have higher productivity rates and longer tenures within their organisations. Companies find that engagement isn’t something which can be purchased through higher pay, more benefits, or branded swag. The Meaning and Purpose at Work report found more than nine out of ten employees are willing to trade a percentage of their lifetime earnings for greater meaning at work. Employees seek organisations which share their personal values, and expect the organisations to indicate the connection between what they are doing and the company purpose.
Responsibility for change goes beyond the brand and down to the leadership team. The Edelman Trust Barometer found that 64% of people globally expect CEOs to lead on social change rather than waiting for government intervention. A significant 84% expect CEOs to influence policy debates on social issues.
Companies who fail to recognise their growing responsibility to speak up risk being left behind. Their commitments to change must be matched to internal actions – including factoring diversity and inclusion metrics into their hiring decisions and increasing diverse representation within the room at all levels of the organisation.
The Commercial Risks of Failing to Act
Companies who fail to make strong commitments and take meaningful action towards addressing lack of diversity and systemic inequalities risk losing both consumers and employees. Equally disadvantaged are companies who limit their actions to the surface, hoping consumers and employees will overlook their failure to act simply because they are vocal on the topic.
Shareholders are key in tackling this issue by holding companies accountable to their diversity and inclusion commitments. Jesse K. Hidell-Carrijo, writing for Saxe Doernberger & Vita, P.C. on Lexology, highlighted, “There have already been nine shareholder derivative actions filed against major U.S. companies alleging that their directors breached their fiduciary duties to the company by failing to include an African American on the company’s board, despite numerous statements declaring a commitment to diversity… This trend of diversity-related lawsuits is not slowing down.”
The Business Case for Diversity
But what about companies who are taking the lead on tackling racism? If there was any concern that taking on purpose in addition to profit could have a negative impact on returns, even the latest studies are putting that theory to bed.
Morningstar examined the long-term performance of 745 Europe-based sustainability funds and found that the majority of strategies have out-performed at the one, three, five, and ten-year time horizons. “The findings debunk the myth that there is a performance penalty associated with ESG investing,” said Hortense Bioy, director of passive strategies and sustainability research at Morningstar.
Perhaps even more critical is how well ESG committed organisations weathered the 2020 pandemic. Fidelity put their assertions to the test in a November 2020 white paper. The company entered the crisis expecting the highest rated ESG companies to outperform (or suffer less) than their lower-rated competition. They found, “The companies at the top of our ESG rating scale (A and B) outperformed those with weaker ratings (D and E) in every month from January to September, apart from April. Over the nine months, the A-rated stocks outperformed the MSCI AC World, while the linear relationship across the ESG ratings groups in the earlier research, which saw each one beating its lower rated group from A down to E, also held firm across the longer nine-month time frame.”
From an investor standpoint, finding a company or fund which can not only generate returns during market peaks, but also hold up under extreme crisis, is extremely valuable.
How We Can Help
Although the investment community is small, its influence is huge. Together, the Black British Business Awards, The Network of Networks, London First, the 30% Club, The 100% Club and Diversio have launched the Global Investor Strategy and Corporate Governance Forum focusing on Race Equity. Meeting quarterly, the forum will highlight market trends, regulatory changes, and evolving investor expectations with respect to ensuring greater transparency and action to address structural racism and inequality.
For more information on how you can be involved, contact [email protected]