Investing with diversity and social impacts in mind
Summary: What are the investment opportunities with companies that attach great importance to diversity and social impacts?
Level: Any experience
The past two years have been eventful in many ways. The coronavirus held society in its grip, and social unrest also played a role. Fortunately, there is hope with the upcoming removed restrictions, but even so, this has been a restless year. Besides the fact that many people are "more than a little tired of corona"—and are increasingly expressing this in demonstrations—there is much to be done in the field of inequality. It will be a while yet, but 21 May is World Day for Cultural Diversity for Dialogue and Development. On this day, the value and necessity of cultural diversity will be highlighted. The subject of mutual acceptance, respect and diversity is also more alive than ever among colleagues, family and friends.
What about investors? I have noticed that they too are paying attention to this highly complex subject. But as befits investors, they also try to think in terms of opportunities. In other words, what are the investment opportunities within companies that attach great importance to diversity and pay attention to people on a social level? With this article, I want to help investors who value this and want to add a positive note to their portfolios.
What is diversity?
Diversity means variety. Diversity can take place within a society, in the form of different ethnic groups, but also within nature. In this article, the word "diversity" is focused on differences in ethnic backgrounds. Policies on diversity want to take those differences into account. In companies and in governments, this is usually reflected in the workforce. The aim is to have as many employees as possible with different nationalities, orientations, genders, ages, disabilities, religious beliefs and (cultural) origins.
The development of increased diversity within the business community is to a large extent caused by the changes in the labour market over the past ten to thirty years. More and more people over 50, women, employees with mental or physical disabilities or people of foreign origin are looking for jobs.
For years, the well-known American magazine Fortune, together with Great Place To Work®—a specialist in the field of "culture in the workplace"—has been compiling a ranking of the 100 best American companies to work for. Diversity policies and attention to social acceptance are important criteria for companies to be included in the list. Curious about the 2022 overview? Looking at it, you will come across a number of big names, such as Adobe, Cisco, Hilton and Nvidia.
Diversity: an ingredient in (one of) the three Ps
If you zoom in on the companies in the rankings, you will discover that their DNA contains the three Ps. In other words, people, planet and profit. Diversity is also an important ingredient, which falls under the people category.
Additionally, the higher a company scores on the three Ps, the more sustainable it is.
This abbreviation stands for Environmental, Social and Governance. Companies that operate according to these criteria stand for respectful treatment of the planet, animals and fellow human beings, and for good corporate governance. From lower CO2 emissions to the elimination of child labour, all aspects of doing business responsibly are taken into account by ESG-conscious companies.
There are various indices, including the STOXX® Global ESG Leaders, in which well-scoring companies from an ESG perspective are compiled. There is also a ranking of countries based on ESG criteria. Both of these can be helpful resources for making informed investment decisions.
ESG investing: lower profits?
The ESG philosophy is a nice thought, but of course it must yield something to appear inviting to investors. Unfortunately, sustainable investing has a somewhat dull image. In fact, many investors think that they will have lower profits with this investment strategy than with non-sustainable companies.
A Harvard study shows that sustainable investment actually yields more than non-sustainable investment. Their conclusion: the financial results and investment returns were significantly better for companies that had implemented ESG in their corporate strategy and culture.
Build capital while looking out for the environment and society
Of course, you can buy shares in companies like Ebusco, Microsoft or Fastned. Investing in individual shares, however, is generally riskier than spreading your investment across a diversified fund or ETF.
During my search, I came across two effective building blocks for investing with a clear conscience: the UBS MSCI EMU Socially Responsible ETF (ISIN LU0629460675) and the GuardCap Global Equity Fund (EUR) Acc mutual fund (ISIN IE00BZ036616). A key similarity is that both funds invest according to ESG criteria, with a more than above average focus on the social aspects.
The UBS ETF typically holds 50–60 European large-cap stocks (currently including Adidas, Danone and SAP), while the GuardCap ETF typically holds 20–25 global stocks (currently including Essilor, Nike and UnitedHealth Group). The ongoing charges are respectively 0.28% (UBS) and 1% (GuardCap) per year. Both funds are quoted in euros and they are tradable via Saxo on Euronext Amsterdam (UBS) and the mutual fund exchange FundSettle (GuardCap).
The primary objective of the UBS fund is to track the performance of the MSCI EMU NR EUR index. For GuardCap, the goal is to beat the MSCI ACWI Growth NR USD index. UBS succeeds in its task with verve; the GuardCap fund has managed to beat the index over the past five years. Therefore, the UBS ETF scores five stars with Morningstar, and GuardCap scores four. The dividend for UBS, which is around 2.5–3% annually, is usually paid in February and August. The GuardCap fund reinvests the dividend—about 1.25%—automatically (there is no payout variant available). These returns are a nice bonus for funds that do not primarily focus on dividends.
It may come as no surprise, but both funds invest in stocks that score high in terms of sustainable business practices and have a smaller CO2 footprint than their sector peers. Both funds receive five globes for the Morningstar Sustainability Rating™. The Morningstar Analyst Rating™ is also excellent for both funds: Silver for UBS and Gold for GuardCap. Overall, I have rarely seen such ratings in multiple areas.
In terms of investing like a football coach, they are solid midfielders with offensive momentum. There is a currency risk with GuardCap. The fund is quoted in euros, but there are many foreign companies within it.
In a nutshell, the titles are interesting for long-term investors who can and want to bear equity risk. The funds are a good choice for those who want their investments to have a positive impact on the environment and society, with a good emphasis on social impacts.
Investing carries risks. Your investment may depreciate.
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