The implementation of sound diversity and inclusion (D&I) policies is becoming more and more important for successful companies who want to remain so. In the meantime, the definition of diversity continues to broaden, for the better, as corporate cultures build upon the foundations created by gender and racial diversity policies to incorporate other forms of diversity such as sexual orientation, cultural, religious, age, and disability.

Leaders have been motivated to implement these policies by the culture that D&I inspires. Executives and directors have also been motivated by pressures brought by the recent emphasis on addressing environmental, social, and governance (ESG) issues, as investors demand companies do more: be more diverse, more transparent about their diversity, and to have policies in place that ensure that diversity. According to S&P Global, “investors are increasingly incorporating assessments of companies’ gender diversity and equity to determine how they might respond to ESG risks and opportunities.”

The ability to report on and evaluate a company’s degree of diversity in an objective fashion is a tremendous development that is expected to gradually improve D&I across all industries. That reporting provides valuable input to demonstrate another very important reason for embracing D&I: it improves financial performance and increases shareholder value.

A January 2018 study from McKinsey, “Delivering through Diversity,” researched more than a thousand companies in 12 countries, and found that those companies that had a higher degree of gender diversity in management were more likely to have better financial performance than those that were less diverse. More specifically, “top-quartile companies on executive-level gender diversity worldwide had a 21 percent likelihood of outperforming their fourth-quartile industry peers on EBIT margin, and they also had a 27 percent likelihood of outperforming fourth-quartile peers on longer-term value creation, as measured using an economic-profit (EP) margin.”

D&I is as important in the composition of boards of directors as it is of management. The Harvard Business Review (HBR) has extensively covered this topic, making several important findings: for example, large cap companies with at least one female board member had higher returns on equity and higher net income growth, on average, than those that did not.

There is a strong case for investing in companies that are more diverse compared to their peers, with some evidence that diverse teams make good investing decisions. The HBR report also cites the result of an experimental study based on a market simulation that found diverse teams were 58 percent more likely to price stocks correctly than those consisting of homogeneous teams. Another report from Morningstar Research, analyzing the composition of portfolio management teams of funds, revealed that the performance of all-female fund teams in the study had outperformed mixed-gender and male-only teams.

Last, but not least, there is an extensive research study on the venture capital (VC) industry, conducted by the HBR, that provides the clearest evidence of the returns generated by diverse decision makers. It concludes that diversity significantly improves financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns.

The momentum is in the right direction as D&I becomes institutionalized and sophisticated investors pursue the return on diversity. The onus is on other investors to follow suit, consider this important component of their total expected return, and shape the behaviour of the companies they invest in for the long term.

Hopefully, this pattern will turn into a virtuous cycle that further fuels more aggressive action towards implementing D&I, as much work remains to be done. Pay gaps and the underrepresentation of diverse groups are widespread, and how much D&I work has been done varies by industry, as well as by company: the oil and gas sector, for example, is lagging behind in the number of women leaders in their ranks.

It is well understood that the investor pool is becoming more diverse as inclusivity brings about more economic mobility. Dedicating resources to improve D&I, then, also makes sense in order to appeal to a broader investor base that is motivated by more than just financial performance. Both the qualitative and quantitative measures favour the drive towards better and more effective D&I policies. It’s common sense and best practice for the success of a company, today and tomorrow.