The next generation of investors demands more from their portfolios. While they still expect to generate returns that will fund a home, their children's education and retirement, a growing number also expect their investments to make a difference. They believe the power of their portfolios can be harnessed to positively impact the issues they care most about, building more diverse, more sustainable and higher-performing companies.
Investors engaging in sustainable, responsible and impact investing — which reached $8.72 trillion in assets in the U.S. in 2016 — rely on information like a company's energy emissions, employee policies or executive pay structure to better evaluate the long-term health and future financial performance of their investments. Many are broadening their focus to include corporate governance, invoking investing's fundamental tenant — diversification — as one measure of a board's ability to minimize risk and maximize shareholder returns.
The results are telling.
A
global McKinsey study found that corporations with the most ethnically and culturally diverse boards were 43% more likely to experience higher profits. Similarly, companies with the most gender-diverse executive teams were 21% more likely to outperform on profitability. The Bloomberg Financial Services Gender-Equality Index, comprised of firms with a demonstrated commitment to gender equality, consistently has outperformed the MSCI World Financials Index.
With this knowledge at hand, Vanguard, BlackRock and State Street have expanded their own diversification efforts to the companies they invest in. In 2017, all three firms publicly challenged boards with shareholder proposals to add more women and diverse directors. That same year, State Street voted against 400 companies that had failed to initiate efforts to diversify. As of July, 152 had added a woman to their board. An additional 34 have committed to do so in the near future.
As the investment case grows, an ability to help clients navigate emerging ideas and information surrounding SRI will be critical to attracting and retaining the next generation of investors, and gaining access to an increasingly large pool of assets. Millennials and younger generations stand to inherit $30 trillion, representing the largest intergenerational wealth transfer in human history. And millennials surveyed in a 2017
Morgan Stanley study were twice as likely as the overall population to invest in companies or funds targeting social or environmental outcomes.
As well as being stewards of your clients' investment goals and assets, your responsibilities extend to diversifying the composition of your own firm's leadership. You will only benefit.
(More: The latest news and resources on Diversity & Inclusion in financial advice)
Research has shown that diverse teams are better at mitigating risk, find more innovative solutions and, as we've already seen, deliver stronger financial performance. Having a diverse management team also will signal a genuine understanding and commitment to the investment principles guiding a growing number of young investors.
Establishing cultural change can be challenging. In the four years since Helena Morrissey and I launched
the U.S. 30% Club, an organization of business leaders dedicated to achieving better gender balance in the workplace, the percentage of female S&P 100 directors has increased from 20.2% to 24.7%. During that same time frame, our CEO and chair members have proven that dedicated leadership can accelerate that pace of change, achieving an average of 30% female representation in their boardrooms, up from 21.7%.
These executives are taking concrete steps to bring more women into the boardroom, and leading by example. They are adding board seats, looking beyond traditional, sitting-CEO candidates, and working with executive search firms to identify board-ready female talent.
Vanguard chairman Bill McNabb spoke recently about using a version of the "Rooney Rule," an NFL policy requiring teams to interview minority candidates for head jobs, during a recent search for two open board seats. Vanguard added two women to its board last year, and Mr. McNabb credits them with "lifting the quality of the board dramatically."
Executives' call to action is a leading example of the progress we can drive, working together as an industry, to achieve a new definition of the economic power of diversity: diverse assets, diverse leadership and investments in the companies that pursue diversity.
Peter T. Grauer is chairman of Bloomberg LP and co-founder of the U.S. 30% club.
