By Nicolas Magnac-Dajean, CFA, Senior Multi Asset Investment Specialist at Nordea Asset Management

Investors have an interest in trusting companies committed to diversity and inclusion. They will be better able to seize long-term growth opportunities.

While compliance with ESG (Environmental, Social and Governance) criteria is at the heart of many asset managers’ concerns, it must be recognised that the “S” remains a blind spot in responsible finance. However, the promotion of diversity and inclusion and the fight against discrimination within companies can have largely positive repercussions for society as a whole… but also for investors. If we refer for example to the Sustainable Development Goals (SDGs) set by the UN for 2030, taking into account SDG 5 (Gender equality) will have a positive impact on SDGs 1 (no poverty), 2 (zero hunger), 3 (good health and well-being) and 4 (quality education). Access to education for young girls and progress in gender equality thus appear to be essential conditions for economic development for the benefit of all, both for emerging and developed countries.

Opening up to all talents

For investors who want to make an impact while balancing financial performance with controlled risk, the themes of diversity and inclusion are a natural choice. Looking at companies with a strong diversity and inclusion practice is a smart way to identify issuers that are likely to generate attractive long-term returns. Studies prove it: companies in the top quartile in terms of diversity have a 25% probability of achieving a higher operating margin 1. Companies that are more diverse and inclusive are more likely to attract talent. For example, L’Oréal and Meta Platforms 2 have a high proportion of women in their workforce and management teams, as well as an assumed diversity. We believe they are in a more favourable position to better capture the environment and the expectations of their customers. A study also shows that companies with at least 15% of women among senior managers have a return on equity (RoE) that is 18% higher on average. 3 Finally, the same study shows that companies with more than 50% women in their top management pay dividends 14.8% higher than the MSCI ACWI index.2

Realistic approach

Believing that diversity and inclusion are sources of long-term performance potential, we offer the Global Diversity Engagement Strategy. Within the broadest possible investment universe (MSCI All Countries), we seek to identify companies that are truly committed to diversity and inclusion. For example, we will select companies whose upper management has at least 30% minority gender, or with a credible trajectory to achieve this. The strategy takes into account cultural differences (e.g. Japan or emerging countries), and the recent trajectories of companies located close to this threshold. The key is to have a realistic approach according to the geographical areas to identify the companies where the will of the management and the potential for progress around these issues are the most significant. 

Criteria under the microscope

The criteria under the microscope are divided into 4 main themes: Management Diversity, Inclusion, Talent Pipeline and Diversity-related Change.  

The first theme includes the percentage of women members of the board of directors, middle management and the payroll. Inclusion includes data related to the presence of a diversity manager, the measurement of pay gaps by quartiles, as well as the presence of diversity and inclusion criteria in the evaluation of senior managers, which has been collected since 2017 by the Bloomberg Gender-Equality Index (BGEI) Reporting Framework. The talent pipeline factor  includes criteria such as the implementation of a strategy to increase the representation of women, or the implementation of an action plan to increase their share in management, which is also included in the Bloomberg BGEI index. Finally, the theme of diversity change included the publication by companies of their time-sensitive action plans to close the gender pay gap. 

Prioritise engagement

Our approach is to focus on companies looking to improve their diversity and inclusion profile. There is no question of being interested only in the “good students” but even more so in those who are committed to becoming one. This is the challenge of our commitment approach. As shareholders, we vote at the general meetings of the companies invested and maintain vigilant support for the selected companies to help them progress towards excellence in diversity and inclusion. The final impact for the shareholder will be even higher for companies that have been able to change their practices in the right direction, as companies with a diverse workforce tend to see their creativity and innovation strengthened thanks to the contribution of varied perspectives and experiences, as shown by the success of L’Oréal. 

In concrete terms, we are focusing our commitments on companies that are improving or lagging behind, with a stronger effort on the latter category. We not only contact the companies in the portfolio to push them on the publication of data, but we verify and follow them. We also engage with them on diversity at senior levels of leadership, as well as inclusion and the pay gap. 

The American example

Employees from different backgrounds and working within the same company are often better equipped to understand the evolution of their markets and detect the trends of tomorrow. Thus, the big American technology companies are driving the market upwards. Cisco, Microsoft or Meta Platforms have very diverse boards of directors and engineering teams. On the other hand, we have seen companies that are less committed to diversity and inclusion have lower financial performance overall. At the same time we have seen a massive outperformance of diverse technology companies, which accounted for nearly 50% of the performance of the S&P 500 or MSCI World indices. Still original, this analysis grid can offer opportunities to investors who are aware of this theme.