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The power of diversity and inclusion as an investment strategy

Empowering human capital and addressing social inequality is increasingly being seen as a driver for business success as well as making a difference to people’s lives and livelihoods. M&G Investments’ Thembeka Stemela Dagbo, manager of the M&G (Lux) Diversity and Inclusion Fund, talks to Sue Whitbread about asset allocation and stock selection as well as why she believes the fund is ideally positioned to generate positive returns for investors as well as meeting stringent social, sustainable and impact goals.

SW: What are the aims of the (Lux) M&G Diversity and Inclusion Fund and what are some of the high level challenges you’re facing within the asset allocation strategy?

TSD: The M&G (Lux) Diversity and Inclusion Fund is a global equity strategy with a concentrated portfolio of 30-40 stocks aiming to provide a higher total return than that of the MSCI ACWI over any five-year period.

The fund is structured to invest in companies that we believe are demonstrating high levels of either gender or ethnic minority diversity, whilst also investing in companies that we believe have solutions that are helping to bring about social equality.

It’s important that these companies have sound sustainability credentials, that they’re not just, perhaps, doing good in one area but then not doing that in another.

We recognise the fact that we can’t think about diversity in isolation. We also need to think about some of the companies that are helping to bring about greater diversity in society by providing empowerment solutions as well. That’s where the initial premise of the fund came from.

The key challenge we face is the general lack of diversity which exists within businesses today. Whilst some regions, such as the U.K., for instance, have made solid progress in improving gender representation at board level, the reality is, when you look more broadly and in different geographies, that starts to fall apart.  Within S&P 500 companies for example, we see significant under-representation of both women and ethnic minorities at the highest levels.

Our aim is to encourage companies to create management structures and workforces that are more representative of the societies that they serve.  We believe this is strategically important for these companies as the societies that they essentially serve continue to evolve. More women are becoming wealthy in their own right and are therefore able to contribute and consume more than they have in the past.

Greater numbers of people from ethnic minorities are also reaching the higher echelons of society, and they also need products and services that would serve them. It’s about recognising that and recognising that there’s also a competitive advantage to having greater and more diverse insights in the companies that essentially run the world.

That’s what this fund is also aimed at, trying to resolve and encourage more diverse insights when thinking about investment decisions.

SW: How is the fund structured to meet those aims?

TSD: Given our aims regarding diversity and boosting social equality, the fund is really a hybrid of a sustainability fund as well as an impact fund. Interestingly, we find that there are opportunities for us to invest across most sectors and most geographies, which is so encouraging. For example, we found many companies in Africa that are providing solutions that help empower social inclusion within these societies, plus we see that a lot of their boards and management teams actually have high levels of gender diversity as well.

Within the sustainability arena, we recognise companies that not only have higher representation in terms of gender, ethnic minority in all their management levels, but also those with policies and processes that create more inclusive work environments. Essentially, we want to make sure that these companies in which we are looking to invest are actually ‘walking the talk’. Where they do so, they’ll probably maintain or even further enhance the levels of diversity they have.

For the ‘impact’ part of the portfolio, we’re investing in companies that have products and services that are set up to cater to the underserved populations in society. That could be women, people with disabilities, ethnic minorities or underserved populations in emerging markets as examples.

By combining the impact element of diversity as well as the sustainability element, we encourage companies to become more diverse as they serve a more diverse and evolving set of customers.

SW: What assessment frameworks do you lean on when you invest within the fund?

TSD: We leverage a few different frameworks here.  For the diversity element, we have created a framework called an EQUAL score, where E stands for ESG, Q stands for quality etc.

This helps our company due diligence to identify companies with strong investment credentials with a quality bias. Companies must score above average for category in order to be included in our watch list and funds so we can make sound investments whilst honouring sustainability and impact mandates.

We also use the ‘Triple I’ (III) framework – used in M&G’s Positive Impact Fund too – to assess investment, intention and impact. Again, we want to ensure that not only are companies impactful and intentional about their impact, but that they also offer sound investment prospects as well.

The fund, which is supported by the M&G’s Stewardship & Sustainability team, also embraces the United Nations Sustainable Development Goals (SDG) framework. The fund maps each holding to its prime or dominant SDG, focusing on six key areas: Quality Education, Gender Equality, Decent work and Economic Growth, Industry, Innovation and Infrastructure, Reduced Inequalities and Peace, Justice and Strong Institutions.

While we support the UN SDGs, we are not associated with the UN and our funds are not endorsed by them

In terms of the diversity companies, the most obvious ones are gender equality, as well as those bringing about reduced inequalities. Other SDGs related to health are important too, where companies may be providing affordable access to health care to underserved populations.  Other areas are companies helping to bring about greater access to infrastructure, better work and education.

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