Return to search

Morgan Stanley aims to incorporate diversity into investments, sees outperformance

Research spearheaded by Chief US Equity Strategist Parker

Investment banking giant Morgan Stanley says it plans to incorporate diversity and other social and responsible behaviors into how it approaches its investments.

It comes as it has issued research that found that companies with gender-diverse workforces deliver better returns and lower volatility than their low-diversity or sector peers, moderately outperforming them on average in the past five years.
“Ultimately, it is our hope that we can more overtly incorporate diversity and other social and responsible behaviors into our investment discipline,” said Chief US Equity Strategist and Director of Quantitative Research Adam Parker.
It said that to meet investor demand for ESG issues such as gender diversity, and how they affect corporate and portfolio performance, its quantitative analysis “now provides lists of stocks that screen well or poorly on gender diversity metrics, along with favorable/unfavorable stock selection model rankings”.

It reflects a push by the bank into SRI research: it shot to top position for SRI research based on the views of the UK buyside in UKSIF/WeConvene Extel survey in the brokerage firms, socially responsible investment (SRI) research category in July last year. In January 2015 it released a framework for analyzing ESG risks.

The new diversity framework released this month is designed to compare companies vs. their regional sector peers on gender diversity indicators to avoid various regional and sector biases.

Data collected by the firm shows that a company’s percentage of female employees has a positive correlation to its return on equity (ROE). The top third of listed companies ranked by the female proportion of their workforce delivered 2% better annualized monthly returns than the middle third, and 3.8% better than the bottom third of companies.The research also projects that high gender diversity companies in North America and Europe will deliver an incremental ROE of around 1% over three years compared to those with low gender diversity.

“More diverse corporate environments result in superior decision making”, the report reads, which in turn leads to “lower volatility, higher profitability and lower accruals”.

The data, published across two reports into workplace diversity, called “A Framework for Gender Diversity in the Workplace” and “Putting Gender Diversity to Work: Better Fundamentals, Less Volatility”, is the result of a new framework created to assess gender diversity at 1,600 listed companies in developed markets by looking beyond just numerical data.

To create the gender diversity model, Parker’s team identified three major elements: the percentage of women in the workplace, company policies that promote equality and programs that accommodate the needs of women and working parents.

The framework places most statistical weight (50%) on the proportion of female employees, managers and directors that a company employs. Researchers then combined these scores with financial data to arrive at the report’s findings.

The report concludes that implementing a higher proportion of female workers and decision makers could be a beneficial move for most companies.

Carmen Nuzzo, the bank’s senior economist for SRI research, reports that the main benefits include increased labor supply; higher incomes, productivity gains, and corporate bottom lines; and reduced poverty in developing countries.

She adds: “In ageing economies, particularly in the U.S., Europe and North Asia, higher female participation and employment rates can also help to counter a shrinking workforce.” Link