Thomson Reuters expands ESG suite with Diversity & Inclusion Index

Sep 28th, 2016 | By | Category: ETF and Index News

Financial data vendor Thomson Reuters has launched the Diversity & Inclusion (D&I) Index, an index measuring the price performance of 100 global companies deemed to possess the most diverse and inclusive workplaces.

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Debra Walton, Chief Product & Content Officer at Thomson Reuters.

The index has been designed to help financial professionals screen companies for long-term opportunities and risks, and is suitable to form the basis for index-tracking investment products such as exchange-traded funds.

“Diversity and inclusion is a fundamental part of our heritage,” said Patsy Doerr, Global Head of Corporate Responsibility and Inclusion at Thomson Reuters. “Not only is diversity and inclusion a strategic objective for Thomson Reuters internally, it also represents another step forward in our commitment to partner with clients to develop best practices in this space.”

The index ratings are supported by Thomson Reuters’ environmental, social, and governance (ESG) data analytics, and applied to over 5000 companies globally. Each company is evaluated on 24 metrics across four key pillars – diversity, inclusion, people development and news controversy. Each company receives four scores based on their performance in each pillar. Only companies with scores across all four pillars are assigned an overall score (the average of the pillar scores), ensuring no company will be selected that scores highly in one area but dismally in another.

The top 100 ranked companies with the best overall scores are selected for the index and these are weighted by free float market capitalization. The index is rebalanced on a quarterly schedule.

The strategy aims to take advantage of an increasing body of research that shows that companies with more diverse workforces perform better financially.

Debra Walton, Chief Product & Content Officer at Thomson Reuters, added: “Our research shows that companies that make investments and focus on ESG matters can have a stronger stock performance and better long-term profitability. For investors, looking beyond financial data is becoming more important. We are delighted to be able to provide our global clients with access to this important data and information through our Diversity and Inclusion Index and metrics, thereby helping to enable them to make better investment and socially responsible decisions.”

According to the results of a recent study by management consultants McKinsey & Company, gender diverse companies are 15% more likely to outperform their industry peers, and ethnically diverse companies are 35% more likely to outperform.

Another study, from MSCI, which explored global trends in gender diversity on corporate boards between 2009 and 2015, found that companies with at least three female board members outperformed others in overall return on equity by more than 36%.

Providing a possible explanation for the outperformance, McKinsey research suggests that more diverse companies are better able to win top talent and improve their customer orientation, employee satisfaction, and decision making, and all that leads to a virtuous cycle of increasing returns. This in turn suggests that other kinds of diversity—for example, in age, sexual orientation, and experience (such as a global mind-set and cultural fluency)—are also likely to bring some level of competitive advantage for companies that can attract and retain such diverse talent.

As of 31 August 2016 the largest country exposures in the index were the US (51.9%), Switzerland (13.8%), Germany (8.3%), France (5.2%) and the UK (3.6%), and the largest sector exposures were healthcare (28.4%), technology (22.2%), consumer non-cyclical (20.1%) and financials (10.3%). The largest constituents were Microsoft (8.7%), Johnson & Johnson (6.5%), Nestle (4.8%), Procter & Gamble (4.6%) and Roche Holdings (3.5%).

Using back-tested data, the index has produced higher returns and lower volatility over the past five years compared to its benchmark, the Thomson Reuters Global Index, suggesting the index’s strategy of favouring firms with diverse and integrated workplaces is effective at boosting risk-adjusted returns.

The index has increased by 86.6% over the past five years with an annualized standard deviation of 11.9%; the Thomson Reuters Global Index increased by 60.1% with an annualized standard deviation of 12.5%.

Source: Thomson Reuters.

Source: Thomson Reuters.

Investors looking for immediate access to ETFs based on a diversity strategy may wish to consider the SPDR SSGA Gender Diversity Index ETF (NYSE: SHE). Launched on International Women’s Day (8 March 2016), it was recently reported that the ETF has grown to over $280m in assets, making it one of the most successful ETF launches of the year so far. The underlying SSGA Gender Diversity Index replicates the performance of the highest ranked companies, by their ratio of women in the top tiers of management. The index currently comprises 187 stocks, each with at least one woman on its board or as CEO. The fund has a total expense ratio (TER) of just 0.20%.

Other similar products include the Alps Workplace Equality Portfolio Fund (NYSE: EQLT), which tracks US companies that support equality for LGBT employees, and the Barclays Women In Leadership ETN (NYSE ARCA: WIL), which specifies that companies must either have a female CEO or 25% women on the board of directors.

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