How investors can tell which companies do better when it comes to racial diversity

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Many companies have made big promises in recent weeks when it comes to improving racial diversity.

Yet investors may be wondering whether the stocks they own include companies that have made racial inclusion a priority.

One index is aiming to provide a measure for that.

The Morningstar Minority Empowerment Index was launched in 2018 to identify companies that are committed to diversity and inclusion through their policies and programs, as well as societal impact.

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“The idea is that the index highlights companies that have a genuine commitment to diversity and inclusion,” said Dan Lefkovitz, strategist at Morningstar Indexes. “It’s selecting companies that have shown through their policies, but also their behaviour, that they take diversity and inclusion seriously.”

The holdings in the index are determined using a Minority Empowerment Score based on a variety of measures. That includes board diversity, discrimination policy, diversity programs, community development programs and supply chain monitoring, among others.

The top 200 scoring companies are then selected for the index, which is reconstituted every year in December.

The businesses are picked from the Morningstar U.S. Large-Mid Index, which means the majority of the index is comprised of U.S. equities.

In addition, company weightings are capped at 5%. Sectors are also subject to weighting constraints.

In December 2018 and December 2019, 19 new companies joined the list. Because the index generally remains at about 200 companies, the same number of stocks also fell off.

Companies can leave the index for a variety of reasons.

For some, one metric called a controversy rating may help explain why. That measures a company’s actual actions and whether they help or hurt minorities.

This year, there could be more movement based on the increased emphasis on racial and diversity inclusion, according to Lefkovitz.

“Because so many are doing things, it might raise the bar, which is ultimately a good thing,” Lefkovitz said.

Year to date, the index’s return is -5.26%. But for the past three months, it is 12.27%, as of June 15. In comparison, the S&P 500 is -3.35% year to date and 23.47% for the past three months.

For investors, the list of companies on the Morningstar Minority Empowerment Index could be a starting point for identifying the stocks in which they want to invest.

Right now, one ETF tracks the index and was launched in cooperation with the NAACP. The ticker is NACP.

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