Diversity and equality: a systemic approach
System-level thinking is a way of viewing a problem as a series of complex, dynamic, and interdependent relationships that influence each other both directly and indirectly. Inequality based on personal characteristics such as gender, race or sexual orientation is an example of a system-level challenge, which requires examining interrelated dynamics in areas such as access to education , health, housing, credit and economic outcomes for women or minorities.
In our view, there is a positive and strengthened relationship between greater equity and inclusion, and additional opportunities for investors (all other things being equal). We see this relationship play out in three ways.
First, we find a positive relationship between increased levels of equality and inclusion and economic growth (GDP). McKinsey estimates that closing the racial wealth gap in the United States would lead to additional GDP growth of 4-6% in a decade. Diversity in itself brings economic benefits in the form of increased innovation potential, especially in industries that are part of the knowledge economy. However, inclusion is also essential. Increasing the inclusion of marginalized communities by creating economic opportunities enables them to participate and contribute to the economy to their fullest personal potential. It also allows diverse communities to collaborate smoothly and efficiently.
More inclusive economic growth can translate into better outcomes for investment portfolios, especially when it comes to specific types of businesses (long-term ones, for example). We view the relationship between more inclusive economic growth and improved portfolio performance as more indirect. Indeed, the benefits of inclusiveness tend to trickle down to the corporate level, through greater innovation or the power to grow profits that can come from things like lower employee turnover and better recruitment practices.
Second, we see a positive relationship between increased equity and inclusion and longer-term growth opportunities for companies that are aligned with this theme. As diversity levels increase and we see a societal shift in the perceived importance of diversity, equity and inclusion, we expect to see increased pressure from stakeholders (from governments and investors) for businesses to become more inclusive (and more diverse). We also expect that a more equitable and inclusive society where marginalized groups have increasingly higher purchasing power will create opportunities for the businesses that care for them, while expecting those businesses to be themselves more inclusive and diverse entities. And finally, as traditionally marginalized people gain access to better education and experience, the pool of potential skilled workers ready to take their place at the helm of businesses continues to expand.
Third, investing to improve key ‘access’ areas is critical to creating a more equitable and inclusive society, and may present opportunities for comparable or improved risk-adjusted returns. By “access” domains, we mean four main domains where there are systematic gaps in access based on gender, race or sexual orientation: quality education, home ownership, health care and capital. As noted earlier, each of these areas is uniquely tied to each community’s prospects for creating wealth and contributing to their full potential.
For example, home ownership is a good predictor of household wealth, especially for low-income households for which house price appreciation tends to be a significant component of overall wealth. In the United States in 2019, blacks and Hispanics over the age of 55 were about 25% less likely than whites to own their homes. Similarly, in 2018, a study by Freddie Mac found that members of the LGBT community were 15 percentage points less likely to own a home than the national rate.
Access to capital is another important area, but women and people of color face systematic barriers to financing businesses and investments. To be sure, private investment is only one component of the total investment needed to close these gaps, and many of them require government investment or policy. In public markets, investors can look for opportunities in companies that provide products and services to help fill access gaps, or in sustainable fixed-income securities with product usage that target those gaps.
Overall, we see multiple investment opportunities in equities, fixed income and private companies that align with this theme – enabling investors to invest for a more equitable and inclusive society, and for financial returns. To learn more about the Diversity and Equality theme of the CIO’s long-term investments, including a look back at 2021 and the Diversity Investment Case, see the full report, published April 7, 2022.
Main contributor: Amantia Muhedini
This content is a product of the Chief Investment Office of UBS.