Impact investing is hot and only getting hotter. From reducing the carbon footprint of your portfolio to fostering women’s empowerment through gender diversity ETFs, investors are using their investment dollars to impact social and environmental change.
While the moral argument for impact investing is obvious, it turns out investing in companies with diverse boards of governance and leadership teams is also good financial sense.
Impact investing is profitable investing. More diverse companies perform better, according to findings by global management consulting firm McKinsey & Co. They found that companies ranked in the top-quartile for the gender diversity of their executive teams were 21 percent more likely to have above-average profitability than those in the bottom quartile. What’s more, companies in the bottom quartile for diversity are 29 percent more likely to underperform their peers on profitability.
And it goes beyond gender diversity: McKinsey found that ethnic diversity can have an even greater impact on company performance than gender diversity. Companies in the top quartile for ethnic and cultural diversity were 33 percent more likely to outperform their industry peers.
This makes economic sense: Board members from different industry skill sets and backgrounds can bring a holistic, objective perspective to the long-term strategy of the company, says Christopher Greenwald, head of sustainable and impact investing research and stewardship at UBS Asset Management in Zurich, Switzerland.
Interestingly, there seems to be a stronger correlation between financial performance and greater female representation at the leadership level than board level, says London-based Valeria Piani, a director and stewardship analyst on the sustainable and impact investing team at UBS Asset Management. This may be because the leadership team has greater influence over operations than the board of directors. It also implies that more important than just having women represented in the board of directors, is that companies “create a pipeline to get them there,” Piani says.
From a business perspective, this, too, makes sense: Companies invest a lot of resources into new hires. For that employee to leave prematurely – say to raise children – and not return is a huge loss to a company’s human capital investment.
“Companies that are able to attract and retain talent are going to be more successful financially over the long term,” Greenwald says. And those “with policies to support women throughout their careers tend to be better at managing their human capital and attracting the best employees.”