It’s time to diversify diversity

INVESTORS STRIVE TO DIVERSIFY THEIR PORTFOLIOS to help minimize risk and enhance performance. Why, then, don’t more companies do a better job of diversifying their workforces? That’s the question posed by a new report published by BofA Global Research, “Everybody Counts! Diversity & Inclusion Primer.”

“The awareness of injustices faced by underrepresented and marginalized groups is at an all-time high, thanks in a large degree to efforts by movements like #MeToo and Black Lives Matter,” believes Haim Israel, Head of Global Thematic Investing Research at BofA Global Research and lead author of the report. “And the pandemic has only served to heighten disparities among minorities.”

But there are other compelling reasons beyond the fact that developing more effective diversity and inclusion (D&I) policies is a fair and equitable thing for corporations to do. An increase in corporate D&I policies could also have implications for investors, says Savita Subramanian, head of U.S. Equity & Quantitative Strategy and ESG Research at BofA Global Research, and a contributor to the report. “There is a new way to think about diversification in investments—via ethnic, racial and gender categories rather than stock, sector and asset class,” she says.

There’s much work to be done

When it comes to giving everyone in our society a full voice in the economy—and that includes African-Americans, Asian-Americans, Hispanics/Latinos, women, LGBT+ people and those with disabilities—progress is overdue. Consider that in 2020, there were no black senior executives in any company on the Financial Times Stock Exchange (FTSE) 100, which tracks England’s largest companies. And at the current rate of progress, closing the gap between men’s and women’s pay will take an estimated 256 years.¹ In fact, significant differences in the employment rate persist along lines of both race and gender. The employment rate of women ages 25 to 54 is 14% lower than that of men,² and Black workers trail white workers by 7%.³ (See graph. As of 12/31/2020.)

Prime age (25-54) employment population ratio by race
Since 2000, the Black employment population ratio is about 7pp lower, Hispanics about 5pp lower, and Asians about 3pp lower than Whites

This state of affairs is ripe for change. Israel notes that a growing number of companies are developing D&I programs, and he sees them as one of the most important tools in the battle against inequality—with a broad impact across societies, throughout economies and in company boardrooms and workforces.

Unequal opportunity carries a price tag

The economic cost of inequality may not be obvious, but it exists—and it has an impact on all of us. The U.S. Economics team at BofA Global Research points to recent work by the San Francisco Fed showing that if there had been no gender and race gaps in education and employment between 1990 and 2019, the U.S. economy would have seen a gain of close to $70 trillion.⁴ The team has also found that closing the race employment gap would provide an additional $150 billion in labor compensation annually.⁵

What the pandemic has exposed—and how we can move forward

The pandemic has been an economic crisis as well as a health crisis. The global economy has contracted, with the impact felt across both developed and developing countries; as a result, the transition of individuals out of poverty in the last few decades and into the middle class is expected to slow. Additionally, during the pandemic the burden of essential work has fallen disproportionately to minorities.

The post-COVID world provides the opportunity to build a fairer, more equitable society. But diversity without inclusion isn’t sufficient to make a difference. For companies to truly benefit from a more diverse workforce—one that more closely resembles their clients and customers—they must also give their employees a seat at the table where decisions are made, the report points out. “Diverse teams have been shown to be more likely to make larger, bolder decisions, a quality that’s bound to better prepare them for future crises,” notes Israel. “They have also shown a greater ability to innovate and to gain a competitive edge by anticipating shifts in consumption patterns.”⁶ This could make D&I-minded companies more attractive to investors, especially those whose values play a significant part in their decisions.

As Environmental, Social and Governance (ESG)  continues to grow as a percentage of overall investing, Subramanian believes social factors are gaining more investor attention—a trend the pandemic is likely to accelerate. For this and many other reasons, Israel says, “We believe D&I is leading the way to tackling the most important social issues of our time.”

For more insights, read the report, “Everybody Counts! Diversity & Inclusion Primer.”