With, as yet, no definitive evidence that greater diversity leads to improved financial performance, we outline our approach.

  • There is research which suggests that diversity leads to improved financial performance; other research suggests this link may be tenuous, if it exists at all.
  • We believe that using a strict application of financial materiality is the wrong way to approach understanding the impact that diversity, equity and inclusion (DEI) issues have on investments.
  • Instead, we take a broader view of materiality, which incorporates issues that are material at a systemic or societal level, and may affect companies across a range of sectors as a result.

When considering environmental, social and governance issues (ESG), investors often focus on financial materiality. Simply put, this refers to focusing on the issues that are most relevant, and have the potential to affect a company in some way. This focus means we frequently find ourselves engaged in debates as to whether specific environmental and social issues affect company financial performance. While there is a growing consensus that ESG issues are collectively material, there is less agreement at an individual issue level. We question whether this is the best approach to take, using diversity, equity and inclusion (DEI) as an example.

First, there is scope for interpretation regarding the definition of materiality.1 We need to be mindful of the time frame under consideration. Specific ESG issues may not be internalized into company business models in the immediate future, and so over the longer term, we may find that issues may be considered financially material, or that the issues which are material to a company evolve. This is captured by the concept of dynamic materiality.2 Next, we consider double materiality, a term coined by the European Commission in 2019.3 Broadly speaking, this concept is designed to capture both materiality referring to a company’s value, as well as the environmental and social impacts a company has on its stakeholders. We may find that certain systemic issues, such as diversity and inclusion, may be material at systemic and societal levels, but it may be unclear if they are financially material to some companies.

There are numerous challenges in evidencing financial materiality. For example, there may be a lack of research, as we see with studies regarding ethnic diversity and company performance. Moreover, even where there is evidence or research regarding an ESG issue and materiality, its robustness may be challenged. So, while there is evidence that diversity leads to improved financial performance,4  5 and some research goes even further to suggest a causal link,6 there are also different pieces of research which suggest this link may be very weak, if it exists at all.7 8 We believe that issues such as DEI can be material to companies, even where this is challenging to evidence.

Evidencing That an ESG Issue Is Financially Material Can Be Challenging and Complex

The McKinsey studies9 are often cited as evidence that diverse companies perform better, but even these studies can be questioned for various technical reasons.10 For example, the studies focus on just S&P 500 companies and only review a two-year time horizon. The studies are also unable to control for numerous other variables, such as firm size or growth opportunities, all of which may affect financial performance too. This is not to say that diversity is not material, but actually that evidencing that an ESG issue is financially material can be challenging and complex. This may be the case even where there is sound logic and reasoning behind an issue being material, i.e. that diverse companies would make better decisions, experience less groupthink, or better reflect the views of customers and society.

In addition, often research is focused on diversity rather than equity and inclusion, which are far more intangible concepts and pose key challenges regarding materiality. For example, how do we measure equity and inclusion when there is no consensus or widely used measurement? Furthermore, there does not appear to be any definitive research on the impact of equity or inclusion on financial performance. It is therefore difficult to conclude whether equity and inclusion are financially material using a strict interpretation of materiality.

This raises the question as to whether we should be focusing on whether or not we can prove that diversity, equity and inclusion are positively correlated with financial performance. We believe that using a strict application of financial materiality is the wrong way to approach understanding the impact that DEI issues have on investments. Instead, we should take a broader view of materiality, which would incorporate issues that are material at a systemic or societal level, and may impact companies across a range of sectors as a result.

First, there are macroeconomic implications of increasing female participation in the workforce that may, in turn, financially affect companies. Research by the World Economic Forum found that this could increase global GDP (gross domestic product) by US$12 trillion by 2025.11 Moreover, this is seen as such an important global objective that the United Nations has dedicated one of its Sustainable Development Goals to gender equality.

Secondly, inequality and lack of DEI is also associated with greater levels of social discontent. As companies rely on a social license to operate, and exist within society, they have a need to balance the interests of their social stakeholders. We expect that companies managing these systemic risks and balancing the needs of stakeholders will be better placed to deliver enduring financial returns, and may be more resilient businesses.

In conclusion, we support the view that DEI is material to investments at a societal level, through both its macroeconomic implications, and as a systemic social issue, much as climate change is a systemic environmental issue. We also believe that DEI is a legitimate aim in itself. Individuals with diverse experience, skills and backgrounds are more likely to make optimal decisions and avoid the pitfalls of groupthink. Companies with diverse teams may find that they better reflect the views and needs of their customers or are better placed to attract talent, while companies with equitable and inclusive cultures may better retain this talent and/or have stronger employee engagement. DEI is also a lead indicator of wider corporate culture. Too often we have seen companies fail or make poor decisions where the board is populated with directors unwilling or unable to challenge a single domineering personality. We therefore believe that DEI is material to companies in a nuanced way, even where this cannot be evidenced by empirical evidence.

There are many benefits that DEI may offer to companies, and there are indications that diversity is positively correlated with performance. However, there are also complexities and nuances. We may have to accept the sound logic that DEI and its impacts contribute to better company and societal outcomes, even where we cannot prove that diversity simply leads to better financial returns.    


  1. Materiality: The Word that Launched a Thousand Debates, SASB, May 2021
  2. Dynamic Materiality In The Time Of COVID-19, Robert G. Eccles, April 2020
  3. The double-materiality concept, GRI, May 2021
  4. Princeton University Press, The Diversity Bonus: How Great Teams Pay Off in the Knowledge Economy, Scott E. Page, September 2017
  5. IFC, Women in Business Leadership Boost ESG Performance, 2018
  6. Gary Low CFA, Diversity and Alpha: Reviewing Academic Research on Correlation and Causation, September 2020
  7. The Business Case for Diversity: A Critical Look at the Evidence, Alex Edmans, February 2018
  8. Does gender diversity on boards really book company performance? Wharton University of Pennsylvania, May 2017
  9. Diversity Wins, McKinsey & Company, May 2020
  10. Is McKinsey wrong about the financial benefits of diversity? Quartz at Work, July 2021
  11. The $12 trillion incentive for closing the gender gap, World Economic Forum, June 2016


Rebecca White

Rebecca White

Global ESG integration lead


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