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Forbes
Forbes
Business
Bonnie Chiu, Contributor

Investors Are Waking Up To Market Potential Of Diversity, Equity And Inclusion

Interest among investors on diversity, equity and inclusion (DEI) continues to gain traction, almost two years after the 2020 Black Lives Matter protests. The Principles for Responsible Investment (PRI), the world’s leading proponent of responsible investment, urges investors to integrate DEI into investment and ownership decisions, through their latest paper.  

“There is a lot of interest from investors on this topic, but while we all know that diversity is good for business, it still isn’t common practice,” says Elena Espinoza, co-author of the PRI paper, on the motivation for undertaking this study. Talking to investors around the world was part of the process of producing the report. “The concept definitely has universal appeal, even though there are regional aspects to consider, such as makeup of population,” continues Espinoza.

In 2021, 94.3% of the proxy vote forced IBM to release data on the effectiveness of the company’s diversity, equity and inclusion (DEI) programs. Getty Images

Recent developments do support the observation that there is more interest from investors on this topic. Some investors have allocated funds to address DEI, such as Citi investing $1 billion to tackle the racial wealth gap in the US. PRI has found that mentions of DEI in signatories’ proxy voting policies have more than doubled from 6% in 2017 to 21% in 2020. Efforts by investors may have led to companies setting more targets around DEI – for example, the Financial Times reports that pay provisions tied to workplace diversity reached 11% in 2021, from 2.5% in 2018. “If investors want to keep up with the world or enter new markets, they need to think about DEI – it has big connection to business performance,” says Elena Espinoza from PRI.

For investors to action on DEI, experts highlight that it is important to distinguish among the three terms, diversity, equity and inclusion, which are often used interchangeably. “The conversations to date have been focused on diversity and gender, but we need to move beyond that. Inclusion is particularly key, as inclusion drives diversity, but diversity doesn’t necessarily drive inclusion. We also want to stress that it is equity not equality, because equity recognizes that there are barriers for certain groups, and it challenges the concept of meritocracy,” explains Espinoza. "Another resource, targeting investors and investment influencers, also launched in February by GenderSmart. This toolkit used the term “Justice, Equity, Diversity and Inclusion” (JEDI). The inclusion of the term justice particularly signifies the systemic barriers that investing can help challenge. “This framing reflects a more nuanced, context-specific and rigorous understanding of what it means to incorporate a broader diversity lens to improve investment decision making and outcomes. Whether it is about tapping into growing market demand and opportunity, or shifting the financial system, there is a role to play for all investors across the risk and return spectrum,” says Sana Kapadia, Head of Content at GenderSmart and the Lead for its JEDI Working Group.

Diversity beyond gender is gaining traction as a topic in corporate boardrooms. getty

Investors also need to see to understand the wide-ranging implications of DEI on investments. According to Anne E. Robinson, general counsel of investor Vanguard, “We believe that diversity, equity, and inclusion risks are equally as disruptive as climate-related risks.” DEI is often understood as a governance issue, known as the “G” when integrating Environmental, Social and Governance (ESG) factors in investing. “In our report, we illustrate that DEI can expand to social and environmental factors within ESG. For example, we included a case study of how discrimination affected decarbonization of the urban environment in the European Union, relating to the concept of just transition,” says Elena Espinoza from PRI, which is seeking to provide more support to investors to think about equity and inclusion in their ownership and investment strategies.

Interest from investors on DEI has yet to translate into action, as less than 1% of the $70 trillion in industry-wide assets under management are managed by female or minority-led asset managers, but it is hoped that resources such as the one by PRI and Gender Smart can support investors in realizing the market potential of DEI.

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