There’s a saying that “teamwork makes the dream work.” In the modern world, a diverse team can be the difference between success and failure. These days, employees, customers, and investors alike know that a talented group of people who advocate for the best ideas really get the job done. Usually, those people don’t all look the same.

Moreover, there are metrics that prove the merits behind the philosophy.

According to the Wall Street Journal, in 2019, the 20 most diverse companies had an average annual stock return of 10% over five years, compared to 4.2% for the 20 least-diverse companies surveyed. 

The world in 2020, though, is much different than it was a year ago. 

With the disruptions to day-to-day life and business caused by the COVID-19 pandemic, it can be easy for companies to identify goals like inclusion and diversity (I&D) as more “feel-good” than critical to success. Now more than ever, though, the reality is that I&D is crucial to long-term success. 

“Commitment to I&D can help drive innovation, overcome business challenges and attract and retain top talent,” according to BlackRock. Even more, I&D “are critical for business recovery, resilience, and reimagination” according to McKinsey

There’s no denying that a more challenging world means that companies need more effective teams, which require diversity. 

Here’s why investors should put their money where the I&D is. 

What Is Inclusion and Diversity (I&D)?

Diversity “is any dimension that can be used to differentiate groups and people from one another. In a nutshell, it’s about empowering people by respecting and appreciating what makes them different, in terms of age, gender, ethnicity, religion, disability, sexual orientation, education, and national origin.”

Inclusion “is an organizational effort and practices in which different groups or individuals having different backgrounds are culturally and socially accepted and welcomed, and equally treated.”

And, when you put these two together, it sounds like an ideal place to work. 

Why? No company operates in a vacuum— all operate in a diverse and quickly changing world, with global customer bases.

I&D has impacts for employers and employees alike. According to Allianz Global Investors, “Only if people feel included, will they bring their full selves to work and give their best. Only if people feel they can share their different perspectives, will companies fully unlock their potential to innovate and make the best decisions.” 

There is more than one Inclusion and Diversity index, but one of the most popular is the index developed by Refinitiv. Using 24 metrics across four key pillars, Refinitiv ranks over 7,000 companies around the world, identifying the top 100 publicly traded companies. The index’s ranking is based on corporate pillars including diversity, people development, inclusion, news, and controversies. 

A similar index was launched by Universum in 2019. Universum’s index focuses on recruiting for diversity. According to the index, cultural diversity is more complex than gender, age, and ethnicity. Rather, cultural diversity extends itself to include personality traits, socio-economic backgrounds, nationality, work experience, and education.

Why Invest in Inclusion and Diversity?

Diversity and inclusion efforts foster a dynamic business environment, boosts idea generation, and is an indicator of long-term success, all of which are markers of good investment opportunities. 

I&D is proven to have an impact in practice. For example, inclusion and diversity helps companies to reach a global customer base. According to a study by the Harvard Business Review, “A team with a member who shares a client’s ethnicity is 152% likelier than another team to understand that client.” Beyond that, according to the same study, it’s crucial for innovation leaders to encourage employees to share their ideas.

Moreover, investing in I&D can help companies to achieve higher returns.

McKinsey’s Diversity Matters study examined data (including financial results and the composition of top management) of 366 public companies across a range of industries in Canada, Latin America, the United Kingdom, and the United States. The study found that: (1) “Companies in the top quartile for racial and ethnic diversity are 35 percent more likely to have financial returns above their respective national industry medians” and (2) “Companies in the top quartile for gender diversity are 15 percent more likely to have financial returns above their respective national industry medians.”

Measuring diversity and inclusion in practice has its challenges, but also its benefits.

According to Dr. Rohini Anand, Sodexo Corporation’s senior vice president and global chief diversity officer: “For every $1 it has invested in mentoring, it has seen a return of $19.”

The Fluor Corporation measures I&D in employee productivity and engagement, which translates to company performance resulting in “indirect costs or benefits to the company.” 

At MGM Mirage, I&D is measured in human resources, purchasing, construction, corporate philanthropy, and sales and marketing. It even includes editorial coverage about its I&D as having advertising value. 

As diversity becomes more important than ever before on investment reports, portfolio managers are seeing more and more correlated to positive returns. Investing in companies that value I&D is not only a way to identify companies that have an edge on their competition, it is also a way to embrace and promote this value in the corporate world. 

How to Invest in Diversity and Inclusion

Naturally, with a theme as broad as diversity, investing isn’t as simple as picking a few diverse companies and calling it good. For those investors interested in supporting a broad swath of companies that score highly on I&D, a search on Magnifi suggests that there are a number of ETFs and mutual funds to consider.

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The information and data are as of the September 24, 2020 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. 

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