A new study from Calvert, a unit of Morgan Stanley Investment Management, examines whether racial and ethnic board diversity can have a positive effect on stock performance.
Diversity in corporate hiring has become more than a social imperative. Today, many companies see workforce diversity as a strategy to help attract and retain talent, enhance intellectual capital and drive long-term value creation.
Our research suggests that using racial and ethnic board diversity factors can improve U.S. large-cap equity stock selection.
According to the study, which analyzed more than 800 large-cap companies in the United States, United Kingdom, Canada and Australia from 2012 to 2020, companies with greater board diversity may in fact be better stock picks.
“Our research suggests that using racial and ethnic board diversity factors can improve U.S. large-cap equity stock selection,” says Yijia Chen, ESG Quantitative Research Analyst and Index Manager at Calvert, who wrote the report. “There may be additional benefit in tilting toward more diverse companies across all four developed markets.”
For U.S. companies, the study found, racial and ethnic diversity on the corporate boards of large-caps had a significant positive impact on stock price: The difference in returns between stocks of companies with the highest number of people of color on their boards and those with the least was 1.5%. Calvert measured stock prices using the MSCI’s Gross Total Returns database, which includes dividends, and the returns were calculated on a monthly basis, then annualized.
Less significant was the relationship between board ethnic diversity and stock prices for Australian, Canadian and British companies. “While we know these countries are less diverse than [the U.S.] and that their boards are relatively less diverse, other factors may be at play,” the report says. Key differences among these economies may have contributed to the disparity, the study found, noting that “the American economy is relatively more reliant on talent and innovation, which will provide equal opportunities for individuals of diverse backgrounds, while a large portion of the Australian and Canadian economies remain natural resources-based.”
Average Percentage People of Color on Corporate Boards by Country: 2012-2020
The study’s findings contribute to growing data on the positive performance of environmental, social and governance (ESG) practices, of which diversity is a key part. Though lingering concerns about returns remain the biggest barrier to widespread sustainability investing, according to a recent report from the Morgan Stanley Institute for Sustainable Investing, 80% of investors still believe that companies with strong ESG practices can generate higher returns and make better long-term investments.
As demand for sustainable investing continues to grow, investors should engage corporations about their diversity initiatives, not only to help optimize the bottom line but to push the envelope in creating a more equitable future, the Calvert report says. “Through rigorous corporate engagement aimed at improving corporate behaviors on diversity, equality and inclusion, we can encourage a change in corporate behavior that can lead to a more sustainable and equitable world.”