Does diversity provide a profitability moat?

Key points:

• Putting aside the question of morality, we find evidence that diversity is ‘economically correct’ in that it is associated with positive economic outcomes for companies.
• As investors, our interest in diversity, governance, and ESG generally is grounded in the relationships we have found between ESG concepts and the fundamental drivers of risk and reward in the equity market.
• Most importantly, for those of us committed to diversity in the workplace, these results support the idea that diversity is not just a ‘nice to have’; we believe it is instead a ‘must have’ in the face of intense market competition.

Foreword

In this study we continue our ESG-focused, fundamental equity research. Of particular interest is how we might use governance data – in this instance board diversity information – to strengthen our appreciation of earnings quality. Earnings quality forms a core pillar of our investment approach. Finding companies that are high quality today is important, but the real challenge is finding high quality companies today that will remain high quality tomorrow.