Companies with diverse leadership and workforces are more attractive to investors than those without, according to new research by Morningstar.

Advisors can use this information to differentiate themselves from the competition, which may only tell investors about financial returns, Morningstar said in its latest Investor Behavior research, which was released today.

“There has been increased attention to diversity, equity, and inclusion within the broader trend of sustainable investing, as companies and investors look to improve the representation and treatment of people from diverse gender and racial groups,” Morningstar said in the research.

Having the information produced by the Morningstar research gives retirement plan asset managers another metric to consider when weighing the merits of different funds that produce good returns, Michael Thompson, Morningstar behavioral researcher, said in an interview Wednesday. “A lot of research is focused more broadly on ESG, but this looks specifically at DEI.”

“We were excited to see that DEI information matters to investors,” added Steve Wendel, Morningstar head of behavioral science. Thirteen percent more money was put into funds that provided the information and showed good results, as well as showing high returns, he said.

“The investors’ appetite is there for information on funds’ DEI success,” Thompson said.

Companies often have detailed data about the diversity of their workforces for regulatory requirements, and increased investor attention to diversity initiatives has made many companies more willing to disclose such information” to investors, the report said. Investors want to “show support for companies with high levels of DEI and find investment opportunities at firms with competitive edges in this arena.”

The data was obtained by asking a total of 522 investors to allocate hypothetical retirement money to different funds, with everyone in the group receiving information on financial performance and a subset given information on the funds’ success in considering DEI.

The results: Compared with survey participants who received only financial information, participants who received diversity-related information allocated 6.7 percentage points more to funds with high DEI scores and 7.3 percentage points more to funds with high gender equality scores, Morningstar said.

Morningstar concluded, “Financial professionals can better serve clients' interests by providing DEI and gender equality information about funds and asset managers and by providing products that score high on these metrics.”

Recent research has highlighted the considerable expansion and strong performance of sustainable investments, which often incorporate initiatives for diversity, equity and inclusion. Earlier Morningstar research showed that funds that emphasize ESG factors outperform those that do not value these issues.

The latest research shows that investors saving for retirement would support ESG factors if given the information, Morningstar said. The bias of investors to support funds that consider ESG and DEI issues “is useful given sustained and growing interest in issues of the representation and treatment of underprivileged groups in the United States, and the strong business case that companies prioritizing diversity and inclusion in their workforces have better performance.

“There also is considerable pressure on companies by investors to publicly disclose DEI data and promote objectives and transparency about equity through a record number of shareholder resolutions in the current season of corporate annual meetings,” Morningstar said.

“Investors may have an underlying belief that funds and asset managers with strong DEI and gender equality will also outperform in the future, or it may mean that investors have non-pecuniary goals and simply value DEI and gender equality above and beyond risk-adjusted returns,” the research said.

“Overall, we find that participants focus on high (historical) five-year returns, but nevertheless allocate a greater portion of their money to funds which have both high returns and DEI and gender equality scores. They allocate less to high performing funds that have low diversity-related metrics,” the research continued. “Investors showed a clear preference for personalizing portfolios based on DEI factors - both by penalizing funds without that information and selecting high-DEI scoring funds.”

Thompson noted, “Including DEI factors can align with an advisor's fiduciary responsibility” to provide all relevant information about the fund choices.