Buy-side firms have recognized the importance of fostering diverse talent within their organizations. Doing so creates diversity of thought and has enabled a strategic advantage that can enhance decision-making, drive innovation, and ultimately contribute to superior investment outcomes.

The business case for diversity

Before diving into the different ways buy-side firms can influence diversity, equity, and inclusion (DEI) in their daily operations and within their investment strategies, let’s consider some statistics about diversity:¹

• Organizations in the top quartile for gender diversity have a 25 percent higher likelihood of financially outperforming their peers
• Organizations in the top quartile for ethnic diversity have a 36 percent higher likelihood of financial outperformance
• Diverse companies earn 2.5 times more cash flow per employee
• Inclusive teams are over 35 percent more productive
• Diverse teams make better decisions 87 percent of the time
• Gender diverse teams are more likely to introduce new innovations into the market

The benefits of diversity are clear.

In the context of investment management, diversity of thought cannot be downplayed. Whether it’s in board composition or an investment management team, you want people who think differently. Diversity of thought is a powerful tool for navigating markets and uncovering unique opportunities. Additionally, as institutional investors increasingly consider environmental, social, and governance (ESG) factors in their decision-making processes, diversity has become vital to a company’s overall ESG profile. Buy-side firms recognize that advocating for diversity is not only ethically responsible but also aligns with their fiduciary duty to maximize returns for their clients over the long term. A study published in Proceedings of the National Academy of Sciences (PNAS) found that individuals in diverse teams were 58 percent more likely to price stocks correctly, whereas those in homogenous groups were more prone to pricing errors.²

Buy-side firms can influence diversity in the industry in several ways:

1. Direct engagement: A direct way to influence a firm is to take a long position in a company and influence the firm to revisit or consider its diversity goals.
2. Proxy voting: This is a more passive way to encourage diversity, as the influence relates to general issues put up by the board, rather than direct engagement on diversity. While proxy voting is passive, it is still a powerful tool for buy-side firms to express their views on matters related to corporate governance. By voting in favour of shareholder proposals that promote diversity, buy-side firms send a clear signal to companies about the importance of fostering inclusive environments.
3. Inclusive investment strategies: Buy-side firms can integrate diversity considerations into their investment strategies. This involves actively seeking investment opportunities in companies that prioritize diversity and inclusion, viewing it as a key performance indicator. By allocating capital to such companies, buy-side firms can incentivize positive change within corporate structures.
4. Collaboration with industry initiatives: Many buy-side firms actively participate in industry initiatives (e.g., Women in Capital Markets) and collaborations focused on diversity and inclusion. By joining forces with organizations like the 30% Club or the Diversity Project, buy-side firms contribute to industry-wide efforts to promote diversity and share best practices.
5. Internal diversity initiatives: Engaging internally is just as critical as external engagement. Buy-side firms can implement diversity and inclusion programs, mentorship initiatives, and training to cultivate a diverse talent pipeline. This enhances the firm’s internal culture and positions it as a leader in promoting diversity within the broader financial community.

Buy-side firms play an essential role in driving diversity within the finance industry. These firms can create a positive ripple effect through strategic engagement with stakeholders, proactive voting, inclusive investment strategies, collaboration with industry initiatives, and internal diversity initiatives. By leveraging their power and influence, buy-side firms can contribute to a more inclusive and resilient financial ecosystem, benefiting their clients, stakeholders, and the industry. 

¹ Statistics from: LinkedIn. Why Is Diversity and Inclusion So Important? LinkedIn Learning. Accessed: January 15, 2024. 

² Levine, Sheen S., Evan P. Apfelbaum, Mark Bernard, Valerie L. Bartelt, Edward J. Zajac, and David Stark. “Ethnic Diversity Deflates Price Bubbles.” PNAS, vol. 111, no. 52 (2014): 18524-18529.