Diversity, equality and inclusion (DEI) are no longer simply a ‘nice to have’ when it comes to business. There is growing evidence that businesses which prioritise diversity do better than those which don’t. Companies which champion policies that promote representation and involvement of people from different backgrounds have been proven to increase profits, drive innovation and enable access to new markets, as well as ensure happy, healthy staff who want to stick around. 

Alongside this, consumer demand for purpose-driven businesses is at an all time high – a global study carried out in 2020 by Zeno Group found that consumers are four-to-six times more likely to buy from a purpose-driven company. Furthermore, when looking at DEI through an investment lens, there is compelling evidence that investments which prioritise diversity outperform those which don’t. A recent study from Carlyle found that the average earnings growth of companies with two or more diverse board members was almost 12% greater annually than an average company. Additionally, analysis from Credit Suisse found that companies with women in more than 20% of top management roles saw their share prices rise more over the previous decade than their peers. 

Despite this, DEI initiatives appear to have stalled or even gone backwards since the start of the COVID 19 pandemic, with inequalities between industries and locations exacerbated by remote working and cuts to organisational spending. As we emerge from the events of the past two years, investors have an important part to play to ensure the market moves forward, but why should they prioritise DEI investing? This article aims to answer that question. 

What is DEI?

Before we go any further, it’s important to define what is meant by DEI. A common misconception is that diversity means gender. In fact, true DEI means including people from all different backgrounds, genders, sexuality, age, disability, culture, race and religion. While there is a fundamental expectation that our workplaces should reflect our society, there are a number of barriers to achieving diverse workforces. One of the main issues is unconscious bias, which is when outside influences – including background, experiences and environment – shape a person’s choices, causing them to favour or discriminate against people without being aware of it. 

When unchallenged, unconscious bias has a huge impact on people-related decisions in the workplace, particularly when it comes to recruitment and promotion. Organisations where bias is prevalent struggle to improve workplace inclusion, which in turn has an impact on overall profitability as evidenced by a 2019 McKinsey study, which found that diverse organisations are 35% more likely to outperform their peers. Unfortunately, it is unlikely unconscious bias will ever be eliminated completely, but there are a number of measures that can be introduced to mitigate its effects. These include training, gender-neutral job adverts and blind recruitment, a strategy which has worked well for UK water company Severn Trent. One of only two FTSE 100 companies with a female chair and female CEO, Severn Trent aims to be a leader in diversity and removes name, grades, university, gender and race from CVs to reduce hidden bias and encourage applicants from all walks of life. 

Why investors should prioritise DEI

Investment companies have an important role to play in progressing DEI for all groups in society. Using capital more effectively to drive positive change will result in equal opportunity and improved access to funds. In this way, strategy can be used to affect widespread societal change. Furthermore, investment companies who prioritise DEI see a number of additional benefits, including:

Reduced risk:

Research has revealed that the more similar the investment partners, the lower the investment performance. Analysis of data from every VC organisation in the United States since 1990 found that the success rate of acquisitions and IPOs was around 11.5% lower on average, for investments by partners with shared school backgrounds, than for those by partners from different schools. The impact of investments by partners of the same ethnicity was more dramatic, as it was found to reduce the investment success rate by 26%. 

More profit:

There is a growing body of evidence showing that diverse companies are seeing increased cash flow and better profitability. From a 2019 study by the Boston Consulting Group, which found that companies with diverse management teams produce 19% more revenue, to Fast Company, who discovered that having women in the C-Suite results in a  41% increase in revenue, to research by Deloitte that found diverse companies have 2.3 times more cash flow, it’s clear that the increased innovation and ability to think outside the box that diverse teams have, brings in more income, resulting in a better return on investment. 

Access to new markets:

DEI is particularly important for companies with a global reach. Understanding different cultures and how to communicate with them is vital for companies who expect to sell to growing markets in Asia and Africa. For organisations to become international, having employees who speak other languages or have lived experience of other cultures are essential to remove cultural biases and overcome stereotypes. Analysis at Harvard Business Review found that a team with a member who shares a client’s ethnicity is 152% more likely to understand that client.

Increased retention rates

Many companies are feeling the impact of the “Great Resignation,” a term used to describe the surge of employees quitting their jobs in light of the COVID 19 pandemic, but companies who prioritise DEI find higher retention rates and more engaged staff. Deloitte found that 83% of millennials are actively engaged when they believe their organisation nurtures an inclusive workplace culture. This drops to just 60% when there is no inclusive culture present. With millennials set to make up 75% of the workforce by 2025, this is a group it would be unwise to ignore. 

Measuring DEI through KPIs 

Investment companies need to be aware that intention doesn’t equal implementation, and the best way to ensure companies have a proven commitment to diversity is to measure success through KPIs. Metrics to measure could include:

• Evidence of how companies recruit, retain and promote diverse talent across all functions, not just board level
• Scrutiny of supply chain diversity, including the impact of a companies’ products and whether they make DEI a key part of product design
• Data about additional categories of diversity in the workforce, including disability, LGBTQ+ and cultural background
• Interrogate pay structures, paying particular close attention to gender pay gap reporting. 

Several institutional investors have realised the impact of dedicated DEI policies, including Goldman Sachs who announced in 2021 that they would no longer take any company public that didn’t have at least two diverse board members, at least one of which should be a woman. On the decision, David Solomon, CEO of Goldman Sachs said “This is an example of our saying, ‘How can we do something that we think is right and helps move the market forward?’” in direct recognition of the change needed at a cultural level to push the industry forward. 

However, the most effective policies go beyond just assessing board level. The importance of looking at the company as a whole and the positive consequences of including diversity at all levels was highlighted by Ursula von der Leyen, President of the European Union, in her speech at the European Women on Boards’​ Gender Diversity Award. She said: “If we look beyond boards, at the top leadership positions, just seven percent of the largest European companies are led by a woman. Boards are one thing; it is the knock-on effect that matters. As more diverse boards hire more diverse CEOs those, in turn, hire more diverse managers.” 

Conclusion

There’s clearly a compelling case for investors to include DEI in their portfolios. As the multicultural marketplace evolves, it’s a critical risk not to navigate investments through a DEI lens. Over the coming years, the industry should expect regulatory pressure, as well as societal expectations as to what best practice looks like; it’s essential to view diversity as an opportunity, not an obstacle and ensure processes, procedures and infrastructure all support a strong DEI agenda to ensure future-proof, profitable investment. 

Written by Janthana Kaenprakhamroy, CEO and Founder of Tapoly

CEO of Tapoly, one of the first on demand insurance providers for SMEs and freelancers in Europe, and the winner of Technology Development at the European Business Awards 2021. Listed by Forbes as number 6 of the Top 100 Women Founders to watch, and among the Top Ten Insurtech Female Influencers according to The Insurance Institute. Recently she has been named as one of the Most Influential Women in Tech 2021 and as the winner of Insurance Leader of the Year by Women In Finance Awards 2021. She was a former chartered accountant and internal audit director at investment banks, having previously worked at UBS, Deutsche Bank, JPMorgan, and BNP Paribas