Despite much debate about the importance of diversity, investors are putting the issue far behind climate change in their list of priorities, finds Andrew Holt.
A revealing new survey shows that investors’ enthusiasm to embrace diversity in the context of investing is well behind that of climate change.
The survey by Procensus, an opinion sharing community for institutional investors, showed that only 30% of investors care enough about diversity and inclusion (D&I) factors to integrate them into their investment decisions.
To understand this, Caroline Clarke, managing director at Procensus, told portfolio institutional: “Climate is a bigger regulatory focus, a bigger focus for asset allocators, and a bigger focus for consumers. Everyone is trying to buy greener products, but not everyone looks at the website to see how diverse the Disney and Netflix boards are before choosing which streaming service they want to subscribe to.”
Given this lack of focus on diversity it is hardly going to impact on or change investment decisions and portfolios any time soon. “Becoming greener is more likely to be a prerequisite for portfolio stocks rather than diversity of leadership teams or a plan to improve diversity,” Clarke added.
In addition, over half – 52% – of the survey’s participants believe that voluntary adoption of D&I targets is a more effective way to integrate D&I considerations into corporate culture versus 27% who believe a mandatory approach would be more effective.
“Over time diversity and inclusion may overtake climate as the most important issue on investors’ agendas,” Clarke added. “It is likely though that this will only become the case once corporates’ carbon footprints and strategies for net zero are better understood by the market. Today, climate related disclosure and net zero planning is anything but consistent or complete.”
Although there are some key reveals in the areas where investors would like to see corporates improve to demonstrate that they are ahead of the D&I curve. These are: disclosing D&I metrics in a consistent and comparable manner having a clear D&I strategy, and communicating the plan and rationale to investors.
Putting these into perspective, Clarke observed: “ESG disclosure in general is poor and inconsistent. Investors are sending the message with this poll that they would like more consistent disclosure from corporates with regards to diversity and inclusion metrics, including leadership team diversity, board diversity and pay gaps as a start, as well as clear communication to investors of a company’s diversity and inclusion strategy.”
Where diversity is a point of interest, the three key performance indicators investors currently focus on within their investment strategy are: leadership team diversity, boardroom diversity and pay gaps – in that order.
Assessing why these are listed in this way, Clarke said: “It is most important to have a diverse and inclusive leadership team, who make most of the important decisions that influence financial results than to measure whether the board, who oversee the leadership team decisions, is diverse and inclusive. Thereafter, it’s important to look at pay gaps as a measure of the longevity of the diverse and inclusive culture at a firm.”
The survey also revealed that the average valuation premium which investor participants would assign to a company with best-in-class D&I strategy executed well versus a company with no such strategy is 0.7xPE – meaning the investor would be willing to pay a premium, of 0.7 points of a PE multiple, when investing in a company with a best-in-class diversity strategy, over one without a diversity strategy, all else being equal.
For example, if the no diversity strategy company traded on 10xPE, an investor would be willing to pay 10.7x for a company which is exactly the same, except that it has a best-in-class diversity strategy.