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Sustainable Investing

Unpacking the case for inclusivity in your portfolio

Over the past year, we have been getting a lot of questions about inclusive investing. The topic has become mired in controversy, leaving some clients uncertain about what inclusivity — the practice of deliberately incorporating diverse perspectives — has to do with investing. We’re here to help unpack this rapidly changing space and showcase how other clients are navigating it as well.

For some clients, inclusivity reflects personal values. For others, it simply makes good business sense because investing inclusively can potentially deliver stronger returns.

With these twin priorities in mind, we help clients find opportunities to invest with managers and businesses operated by people with a wide array of experiences. This diversity of experiences can help them make differentiated decisions that can enhance returns, and better align with some clients’ values.

For clients seeking enhanced returns

Often, critics present inclusivity as a distraction that will impair financial returns over time. The facts say otherwise.

Factually, inclusive investing often outperforms the market. Across all asset classes, diverse managers performed similar to or better than majority-owned peers.¹ In private equity, for example, minority managers ²outperformed the BURGISS index (a benchmark that measures returns in private markets) across key performance metrics between 1998 and 2022.³

Part of the reason that minority managers have outperformed is because their unique experiences and networks can offer differentiated deal flow, which can enhance diversification and mitigate risk.⁴

Haircare products for Black consumers is an illustrative example. Black haircare is a large and growing industry currently valued at $7 billion, with a projected compound annual growth rate (CAGR) of 6% through 2031.⁵ But only 20% of venture capital goes to female founders, and only 1% of venture capital funding goes to Black founders.⁶ These patterns can leave companies that operate in the Black haircare market undercapitalized.⁷ Through their networks and personal experience, minority managers can be well positioned to identify and invest in opportunities like these.

We see similar patterns in the public markets: Companies with diverse teams can be better positioned to service the needs of their diversifying consumer base. Beverage companies with Latino staff, for example, have successfully targeted their marketing campaigns for culturally specific events like quinciñeras and soccer tournaments in the United States. These differentiators have been meaningful as Latinos represented half of U.S. population growth from 2010 to 2020, and are on track to comprise 30% of the U.S. population by 2050.⁸

The trend extends beyond just consumer staples. Across the world, companies that prioritized financial inclusion, for example, have outperformed the MSCI ACWI (a global benchmark) by 6% annually since 2015.⁹

Outperformance of companies who are inclusive

Source: Bloomberg, J.P. Morgan, Data as of October 1, 2023

Skeptics rightfully point out that these trends might not last forever. With so few minority managers and executive teams getting funding, the only ones who do are often exceptional, and that could be driving some of their enhanced returns. As time goes on, if assets get distributed more broadly, then more mediocre minority teams will get funding too and that premium might fade. But the most recent performance data that we have suggests that, at least for now, the asymmetry continues to persist.

For clients who personally value inclusivity

Though they may acknowledge that the business case is strong, some clients are primarily driven by a desire to invest in accordance with values. Having achieved an element of financial success in their own lives, they want to focus on creating opportunities for others and contributing to what they believe to be a more just and equitable society.

As a first step, these clients often apply customizations to their portfolios that divest from companies that violate their values. An LGBTQIA+ customization, for example, can screen out companies that fail to provide equitable benefits for LGBTQIA+ workers. A racial equity customization can exclude companies that have disproportionately polluted in communities of color. A gender equity customization can exclude companies that lag in leadership representation.

This “leaders and laggards” approach penalizes companies that lag in their inclusive practices by divesting from them, and shifts capital toward companies who meet the necessary criteria. In some cases (like those outlined above), there can be a business case for investing in “leaders” that also aligns with enhanced returns. In other cases, there may be no business justification, but clients choose to do so anyway simply because they want to align their investments with their personal values.

One of the things to watch out for with this approach is “impact washing” – which is what we call it when companies make exaggerated (or in some cases, entirely false) claims about their social impact. As more investors express interest in inclusivity, more companies have responded by trying to manipulate their statistics to look more inclusive that they actually are.

Given the prevalence of impact washing, we advise against relying exclusively on self-reported data from companies. Instead, we build portfolio customizations based on data from third-party nonprofits and watchdog groups like the Human Rights Campaign, Equileap, Violation Tracker, and the Political Economy Research Institute. These organizations are staffed by professionals with deep expertise and lived experience in the issue area that strengthens the reliability of their work, and we vet our data sources much like we vet any investment manager on the platform.

Beyond portfolio customization, another approach that some clients take is to invest in active managers that utilize a strategy of corporate engagement. Some investment managers in the industry, for example, have filed shareholder resolutions that companies report on or consider adopting policies relating to inclusivity.¹⁰ Other managers in the industry have negotiated with companies for them to publicly disclose the workforce demographic data that they already share with the Equal Employment Opportunity Commission.¹¹ In both cases, asset managers have used their power as shareholders to push for equity on behalf of their investors, which can maximize shareholder value.

How to get started

If inclusive investing is interesting to you and your family, your J.P. Morgan team can help you explore your options in a way that feels relevant for your goals.

¹Burgiss and Preqin, 2023

²Defined here as TK.

³https://naicpe.com/wp-content/uploads/2023/12/NAIC-2023-Examining-the-Returns-Final.pdf

⁴ https://www.bcg.com/publications/2024/diversity-in-private-investments

⁵https://www.linkedin.com/pulse/black-hair-care-market-size-share-growth-report-2030-plcdc/

⁶https://www.fastcompany.com/91067671/women-co-founders-raise-about-20-of-venture-capital-but-we-often-overlook-them

⁷Dominic Madori-Davis. “Black founders still raised just 1% of all VC funds in 2022. TechCrunch, January 6, 2023.

⁸https://www.census.gov/data/datasets/2023/demo/popproj/2023-popproj.html

⁹https://emea-markets.jpmorgan.com/#research.article_page&action=open&doc=GPS-4675268-0

¹⁰https://www.morganlewis.com/pubs/2024/02/racial-equity-audits-in-the-context-of-proxy-contests

¹¹https://www.morganstanley.com/im/publication/insights/articles/article_calvertsmethodologyforevaluatingdei_ltr.pdf

Clients are asking what inclusive investing really means within their investment portfolio, and what integrating these considerations can deliver.

Preeti Bhattacharji Head of Sustainable Investing, US Private Bank

Olivia Childs Senior Associate

Published Sep 16, 2024

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Unpacking the case for inclusivity in your portfolio

For clients seeking enhanced returns

Outperformance of companies who are inclusive

For clients who personally value inclusivity

How to get started

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