Siyabulela Nomoyi, Quantitative Portfolio Manager at Satrix
The ‘S’ in ESG investing has enjoyed slightly less airtime than its book-ends – E and G. This is likely because climate change and good corporate governance are easier to measure than social impact.
However, we are now seeing great strides being made towards meaningfully and measurably impacting people through investments.
One route – supported by a mounting body of evidence – is to invest in those listed companies that lead the world in terms of the inclusivity and diversity (I&D) of their workplaces. Not only are these workplaces good for people – but they also make a materially good investment. Why? Because the single biggest challenge businesses face today is meeting the needs of an interconnected and layered world. No business can hope to succeed without having a workforce as varied as the world in which it operates. I’d go so far as to say that any company that doesn’t take I&D seriously is at risk of simply not understanding how to service its market.
For investment purposes, inclusion and diversity are tracked against a range of metrics including gender diversity of the total workforce and board; percentage of employees with disabilities; BEE score; the existence of policies on, for instance, mental health and HIV/AIDS; flexible working hours and day care services.
Satrix’s extensive look at existing research has shown that firstly, companies with a diverse and inclusive workforce perform better across a range of measurable factors – among them innovation, talent retention and the ability to overcome business challenges. And big companies seem to buy into this – a Deloitte report cites a Fortune 500 Companies survey which found 51% of companies believed enhanced employee engagement was created by a diverse workplace, 44% said it increased innovation and agility, and 33% said it helped better service customers.
Delving deeper, the Deloitte survey found that Fortune 500 Companies believed diverse workforces were six times more likely to be innovative, six times more likely to be able to anticipate change, and twice as likely to meet or exceed financial targets.
And research from the University of Pennsylvania (as cited by BlackRock, Satrix’s global ETF partner) showed that a simple value-weighted portfolio of the Fortune’s list of 100 Best Companies to Work for in America – based on opportunities, benefits, and diversity – generated a four-factor alpha of 3.5% from 1984 to 2009 – 2.1% higher than the benchmark.
2016 research on the impact of corporate sexual equality on firm performance by Liwei Shan, Fu Shihe, Lu Zheng, found that “implementing corporate sexual equality policies can enhance firms’ financial performance, generating competitive advantage in labour markets and mutual benefits between employers and employees”.
Similar minds working together can be likened to an echo chamber, where the prevalence of certain points of view means the status quo is often simply not challenged. Another wonderful outcome from a workplace made up of very different minds is increased creativity. In a 2020 report on executive directors, PwC says that 19 JSE CEOs are women — just 6% of all CEOs. This is a clear example of why South Africa needs an inclusion and diversity ETF which will allow investors to invest in the change they want to see on the JSE.” He says that it is pivotal for South African companies to take I&D seriously, “I&D plays an important role globally, and specifically in the South African context.
There is a real opportunity to benefit from robust returns while championing the kind of deliberate action we need to move the needle. The King IV governance and JSE regulations set clear diversity targets, but true transformation has been slow. PwC’s nonexecutive report, for example, shows boards in South Africa are still largely white (48%) and male (71%). There’s much work to be done and choosing to invest in inclusive companies is a positive way to drive progress.”
Importantly, investing in I&D doesn’t mean sacrificing financial gains, in fact the opposite is true. In fact, BlackRock’s iShares Refinitiv Inclusion and Diversity UCITS ETF has delivered a total return of 15.37% year to date.
Satrix will launch an ETF later this month which gives investors access to South Africa’s 30 strongest listed performers in terms of I&D. The fund is aligned with Satrix’s deep commitment to diversity and inclusion – however the launch is also based firmly on sound investment principles. The objective of our I&D fund is to champion a new era of shared humanity where investors seek to invest in brands that have societal impact. This strongly aligns with our core purpose to drive the social pillar in ESG. JSE-listed companies are measured against four I&D pillars, namely diversity, inclusion, people development, and news and controversies. The top ranking 30 companies are included in the index.
This fund is ideal for investors who value companies with high levels of inclusion, diversity and people development, and low levels of controversy. Satrix will reveal full details of its new offering, and initial public offering towards the end of July 2021.