The relationship between DEI and investment funds: Breaking down the benefits

Investment funds that embrace DEI criteria are setting the standards for sustainable and socially responsible investing

Paul Moody

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Paul Moody, managing director, CFA Institute

In recent years, the global investment landscape has witnessed a transformative shift as investors increasingly recognise the value of incorporating Diversity, Equity and Inclusion (DEI) principles into their investment and recruitment strategies. No longer merely a moral obligation, DEI has emerged as a powerful force driving financial performance, risk management and investor demand.

The case for DEI integration in investment funds is compelling, and there are several factors why investment funds that embrace DEI criteria are not just gaining prominence, but also setting the standard for sustainable and socially responsible investing.

Beyond ethical considerations, diversity in all its forms—race, gender, ethnicity, age, sexual orientation and more—brings a breadth of perspectives, experiences and ideas to the table. In the fast-paced and constantly changing world of finance, this diversity fosters innovation, enhances decision-making and drives superior investment outcomes.

In addition, an inclusive culture where all individuals feel valued and empowered promotes employee engagement, productivity and retention. For investment funds, this translates into stronger, more cohesive teams, better risk management and, ultimately, enhanced financial performance.

Numerous studies have demonstrated a strong correlation between diversity and financial performance. Companies with diverse leadership teams and inclusive talent acquisition strategies are more likely to deliver higher returns on equity, better stock price performance and greater innovation. For instance, a recent study by McKinsey found that companies in the top quartile for board-gender diversity are 27% more likely to financially outperform those in the bottom quartile. As investment managers have come to discover, funds that integrate DEI criteria can capitalise on this correlation, delivering superior financial returns for their investors.

Investor demand is another key driver behind the rise of investment funds integrating DEI criteria. As investors become more socially conscious and seek to align their investments with their values, they are increasingly looking for opportunities to invest in funds that prioritise diversity, equity and inclusion. This growing demand is forcing fund managers to take notice and incorporate DEI considerations into their investment processes.

Funds that prioritise DEI are better positioned to tap into emerging market trends, cater to customer needs and adapt to changing consumer preferences. Investors recognise the link between innovation and sustainability and those seeking to invest in these funds view social impact as a strategic advantage.

With the broader concept of ESG encountering growing scepticism in some quarters, trust and confidence in a company’s purpose is an increasingly important asset in the corporate environment. Companies that prioritise the opportunities offered by DEI are better at building trust with prospective employees and clients, and those that demonstrate tangible commitments are more likely to be received positively by corporate stakeholders, enhancing their reputation and value.

Combining DEI and social capital

Around the world DEI is intricately linked to the concept of ‘social capital’, forming a symbiotic relationship that extends beyond the boundaries of an organisation. Social capital refers to the networks, relationships and shared values within a community or society that facilitate cooperation and mutual support. In the context of DEI, social capital is both a driver and an outcome of change and holds significant untapped potential.

The intersection of social capital and sustainable investing creates a win-win scenario, where investors who champion ‘conscious capitalism’ can achieve financial returns while contributing to positive social, economic and environmental outcomes.

So, as investors continue to prioritise ESG factors in their investment decisions, companies that value social capital and prioritise DEI are more likely to align with ESG principles. By investing in companies that embrace DEI, investment funds can build portfolios that not only deliver attractive financial returns but also promote positive social outcomes and contribute to a more equitable and sustainable future.

Ultimately, investment funds that integrate DEI criteria are not just meeting investor demand but also mitigating risk, stealing a march on competitors and enhancing long-term value for their investors. By embracing diversity, equity and inclusion, these funds are not only driving positive social change but also paving the way for sustainable and socially responsible investing worldwide.