Sustainability: Three key themes and the role investors can play

For investors, diversity, equity, and inclusion (DEI) has become one of the most pressing of the sustainability issues we need to consider as part of our decision-making process.

The case for making companies more diverse, equitable and inclusive should no longer have to be made. It’s fundamental to the success of a modern-day business, and essential for the good of its clients, employees and the societies that it operates in. Diverse workforces and more equal workplaces help contribute to the financial stability and growth of the companies in which we invest.

DEI has expanded from its roots focusing solely on gender equality to encompass race, religion and broader societal diversity. It has risen near the top of the sustainability agenda to become a business priority – helped by growing awareness through social movements for change, such as #MeToo and #BlackLivesMatter, and in response to the pandemic. This has been accompanied by higher expectations from governments, regulators, clients, employees and shareholders, as well as a shift in the types of DEI that are coming to prominence, such as neurodiversity, disability, age and socio-economic background. Looking ahead, we see three big themes that will influence the development of DEI:

1. Changing world

Investors must take account of, and prepare for, the rapid changes that are happening in the world because these are what will influence the decisions of clients, customers and employees in the years to come. For example, people are increasingly choosing not to start families on the grounds of cost and career, with the United Nations predicting global population decline from 2100 onwards. Unprecedented shifts in the skills and jobs that are needed in the future will disproportionately impact minorities and women.

The generational loss in gender parity since the pandemic has increased the projected time needed to reach global-pay parity from 100 to 132 years. Sexual orientation and gender identity are becoming increasingly fluid. On the other hand, religious identity is stronger, with Islam the fastest growing faith in the world. Amid long-term demographic trends, the Middle East is expected to become one of the most important emerging markets.

Workers everywhere are demanding greater flexibility and a work-life balance, with hybrid-working arrangements reducing barriers to talent. Meanwhile, the public discussion around DEI topics will continue to attract attention, with extremist views, so-called ‘culture wars’, and virtue signaling to be recurring issues. All these changes will affect the labor market, buying decisions, geographical movement of people and product design. Investors will need to think about these issues as they allocate capital for the longer term.

2. The rise of artificial intelligence

The debate about artificial intelligence (AI) is a topical one. There's great potential for AI to deliver benefits for society – helping to solve complex health problems, preserving biodiversity and levelling the playing field in education, for example. However, with as much discussion around the need for AI regulation to avoid it being used to our detriment, there is an interesting DEI consideration.

Many of you will be aware of the power of unconscious bias – the unintended, hard wired, difficult-to-ignore automatic mental processing that we all do. That's why it's important to understand who designed a system, how this design has been implemented, what this system was designed for and who the intended users are. Many organizations are already striving to minimize the potential for unconscious bias through behavioral design – removing names and schools from CVs; comparing candidates to each other rather than against an ‘ideal’ profile. But with AI being used to screen job applicants, the risk of introducing bias will be significant depending on who designed the system and how it was done. A good example of this is the racial bias found in many facial recognition algorithms.

3. Policy support

While the impetus for social change can be organic, change often needs support from regulations to ensure widespread adoption. Only the right policy environment will incentivize more businesses to create more inclusive workplaces. In 2020, companies spent an estimated US$7.5 billion on DEI-related efforts, which will rise to a projected US$15.4 billion by 2026.¹ That said, change isn't happening fast enough.

While there has been progress, policymakers everywhere can do much more to help break down barriers – at schools, higher education and in the workforce. For example, our ‘A Woman's Place’ study identified five ways to improve female participation rates in the workplace:

Ensure that men have access to paternity leave
Reform taxation systems
Consider both the quantity and quality of female work
Strengthen the performance and resilience of the overall economy
Report more and higher quality data

Consistency is critical but unfortunately, DEI regulation, initiatives, targets and goals vary considerably from country to country.

What should investors do?

In a rapidly changing world, it's vital that we keep this topic as a priority within our research, analysis and engagement activities. We must:

Accept that better DEI often means better investments
Investors must seriously consider the DEI practices of the companies in which they invest because there's plenty of research that shows how firms with better gender practices tend to perform better as investments.

In 2015, MSCI ESG Research found that companies in the MSCI World Index with strong female leadership – three or more women on the board, or female board representation above the national average where the company operates – achieved both higher returns on equity and superior average valuations.² This is relative to other companies in the index without strong female leadership, as measured by price-to-book ratio.
Use our voice as engaged investors
Investors must encourage companies to adopt sound and business-relevant DEI practices. We need to make clear that DEI is a core business priority (not something that's ‘nice to have’) and link it to corporate strategy. This helps hold business leaders accountable and addresses the risk of DEI slipping down a list of priorities. It also creates role models at the top and helps employees see that it's the responsibility of everyone in the firm.

We have to encourage better corporate transparency and reporting, because ‘what’s measured is managed’.
Strengthen DEI within our own industry
Fund managers can do more within the asset management industry to adopt better diversity practices on the understanding that this will ultimately lead to better-managed portfolios. In particular, there needs to be more diversity within teams that manage money. We can also build better systems to support the retention of women, in particular those women who want to return to work after having children. We can provide better policies that support flexible working arrangements for families, for example, supporting men in the industry to take parental leave.

¹ "Diversity, Equity and Inclusion Initiatives Report: Inside the Lighthouses 2023." McKinsey, January 2023. https://www.mckinsey.com/featured-insights/diversity-and-inclusion/diversity-equity-and-inclusion-lighthouses-2023.
² "Women on Boards: Global trends in gender diversity on corporate boards." MSCI. November 2015. https://www.msci.com/documents/10199/04b6f646-d638-4878-9c61-4eb91748a82b.

Important information

Unmanaged index considered representative of stocks of developed countries. The index is computed using the net return, which withholds applicable taxes for non‐resident investors. The information contained herein is current at the time of distribution, intended to be of general interest only and does not constitute legal or tax advice. abrdn does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials. abrdn reserves the right to make changes and corrections to its opinions expressed in this document at any time, without notice.

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