Looking for a competitive edge? Embrace diversity
How advisers can tap the long-term performance edge that diverse leadership teams provide
Written by Betsy Moszeter and originally published by Investment News.
Diversity-lens investing is one of the fast-growing categories of sustainable and impact investing. The goal of these strategies, which integrate gender and other diversity factors to identify and invest in companies with heterogeneous leadership teams, is to improve returns and promote more equality at companies — or both.
How fast are these strategies growing? In a 2017 report, Veris Wealth Partners calculated that total assets in gender lens strategies invested in public equities grew from $100 million in 2014 to more than $900 million in 2017. Research by Wharton Business School, also published last year, found growing interest in gender-focused private equity. According to Wharton's Project Sage, 58 funds have raised and are deploying almost $1.3 billion in capital with a gender lens and are seeking to raise an additional $1.8 billion currently.
Women's Financial Power
The growth coincides with, but isn't solely due to, the growing financial power of women. As consumers and investors, women are changing the way society interacts with its money by consistently making more holistic decisions than men about how they spend, save and invest their money.
Currently, women directly control 39% ($11.2 trillion) of the investible assets in the U.S. and are already strong influencers on the disposition of most of the remaining 61%. And they're just getting started.
By 2030, as the greatest wealth transfer in U.S. history builds up steam, women will be the primary decision-makers for two-thirds of the nation's wealth. Based on spending and earning power, women now represent a growth market bigger than those of China and India combined.
The Innovation Imperative
Staying ahead of innovation is one of the critical success metrics that shows up again and again with diverse leadership teams — and it's one of the most compelling reasons to invest in companies that value and promote diversity. Enter the real-world evidence and academic research that diverse teams, both inherent (race, gender) and acquired (experience, cultural background), outperform homogeneous teams in a variety of material ways:
• Diverse teams perform at higher levels than homogeneous ones because they are more creative. The logic is certainly there; a wider variety of inputs from team members enables a team to better identify problems and develop solutions.
• Nonhomogeneous teams tend to outperform because they evaluate more facts and process those facts more carefully.
• Research demonstrates that companies with more women are more likely to introduce radical new innovations into the market over a two-year period.
• Diverse teams are more likely to achieve both short and long-term goals than homogeneous teams.
Three Steps to Innovation with Purpose
The economy of the next decade is unlikely to look like the last ten years. That's because economic and environmental risks are continuing to materialize, and technology-based solutions to these risks are rapidly unfolding.
This ultra-dynamic landscape means investors need to stay on their toes and carefully evaluate relevant risks and opportunities. For many, diversity and inclusion are important elements of a thriving, sustainable economy.
So how can advisers determine if diversity- or gender-oriented funds are living up to their purpose? One simple way is to evaluate holdings on the three "I's":
Impact: Sustainable and impact investing criteria are critical factors, so the first question in evaluating a fund holding is whether it provides solutions that address economic and environmental risks. Investing in a fossil fuel company just because it has some positive diversity or gender factors fails the sniff test — and it's not a strategy for long-term performance.
Inclusion: Inclusion of those who are generally in the minority or not represented at all can clearly be a competitive advantage, so understanding diversity metrics at a company is a logical and effective second level of analysis.
Influence: But raw numbers don't go far enough. One must look at, for example, whether the women in leadership hold specific positions that would be expected to exert enough influence over the company's strategies, goals, priorities and culture to have a meaningful impact.
Diversity's Long-Term Edge
One of the best ways to boost a company's ability to compete involves hiring diverse team members and giving them ample support and influence. In a rapidly changing world, the ability to innovate is really the only dependable competitive edge that exists for a company. Since the diversity of a company's leadership, workforce, and board governance is a proven way to increase the probability that the company will be able to continuously innovate, diverse teams simply make better long-term investments.
Betsy Moszeter is the chief operating officer and an investment committee member at Green Alpha Advisors.