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Sustainable Investing

How Can Investors Measure Diversity, Equity, and Inclusion?

The Morningstar Minority Empowerment Index highlights corporate leaders in DEI.

By Dan Lefkovitz

Read Time: 4 Minutes

In a corporate world awash in acronyms, “DEI” is becoming as ubiquitous as USP and ROI.

Diversity, equity, and inclusion was already a focus for many businesses, but the 2020 police killing of George Floyd, the subsequent movement for racial justice, and the societal inequities laid bare by the coronavirus pandemic provided fresh impetus. Like so many long-running trends, corporate DEI initiatives have been accelerated.

But is it just lip service?

Are corporate execs saying what the moment requires, perhaps making some symbolic personnel moves while neglecting systemic change?

Inevitably, some are, and some aren’t. So, the question becomes: How can diversity and inclusion be measured?

Fortunately, deep expertise can be tapped to answer this question.

The NAACP, America’s oldest civil rights organization, for decades produced a corporate scorecard. Advancing its vision of “equality before the law and fair play everywhere,” the NAACP evaluates companies’ commitment to diversity and inclusion through policies, programs, and behavior.

In 2018, Morningstar built a Minority Empowerment Index that selects US stocks based on the NAACP’s framework. For the growing cohort of investors concerned about DEI, the index represents a slice of the business world that is serious about equity.

Picking Stocks on DEI Criteria

The Morningstar Minority Empowerment Index leverages company-level assessments by Morningstar Sustainalytics, which specializes in environmental, social, and governance research. Securities are derived from the Morningstar US Large-Mid Cap Index, which contained 630 constituents as of April 30, 2024.

The index starts by excluding several classes of companies in the parent index. Securities classified in the Security Services and Correctional Facilities subindustry are ineligible given racial inequities within the criminal justice system. Businesses involved with tobacco, riot control-related products, and predatory lending are also excluded.

The index avoids companies assessed by Sustainalytics to carry high levels of carbon risk or those that are noncompliant with the United Nations Global Compact, which signals commitment to sustainable, socially responsible business practices.

Finally, companies involved in serious social-related “controversies” are excluded. Eligible companies are then selected based on their Minority Empowerment Scores with a target constituent count of 200.

A total of 18 indicators assessed by Sustainalytics contribute to the score:

  • Board Diversity
  • Discrimination Policy
  • Diversity Programs
  • Freedom of Association Policy
  • Scope of Social Supplier Standards
  • Community Development Programs
  • Health and Safety Management System
  • Conflict Minerals Programs
  • Media Ethics Program
  • Human Rights Program
  • Editorial Guidelines
  • Advertising Ethics
  • Human Capital Development
  • Responsible Product Offering
  • Responsible Marketing Policy
  • Human Rights Policy
  • Gender Pay Equality Program
  • Gender Pay Disclosure

Not all indicators are relevant for every company. The conflict minerals issue is germane to businesses potentially sourcing resources extracted from strife-torn geographies, such as the Democratic Republic of Congo. Advertising and marketing practices are important for consumer companies. Gender-related indicators are relevant because of their disproportionate impact on women of color.

Because the index is designed to represent a core US equities exposure that delivers similar risk and returns to the broad market, qualifying constituents are weighted by market capitalization, minimizing turnover and maximizing liquidity.

Sector weights are kept within 2 percentage points of their market weight. Not only does this reduce deviation, but it also recognizes that dynamics related to diversity and inclusion can differ by sector.

The fact that familiar household names dominate the index— (AMZN), Microsoft (MSFT), Apple (AAPL), Facebook (META), and NVIDIA (NVDA) were the top five constituents as of April 30, 2024—is unsurprising.

First, the market-capitalization-weighting approach puts the largest qualifying companies at the top of the index. Second, large companies have the most wherewithal to craft policies and disclose them, though they also face more scrutiny and are likelier to face legal trouble.

Large companies, by virtue of their workforce size and societal footprint, have a massive impact. Microsoft employed more than 160,000 people in 2020, and more than one billion use its products. So, its commitment to DEI affects many.

There are a few companies from different sectors that receive well above market weight in the Morningstar Minority Empowerment Index due to high scores across indicators:

  • Qualcomm (QCOM), creator of semiconductors that enable wireless communications, scores highly on several metrics, including its discrimination policies, diversity programs, social supplier standards, and conflict minerals programs.
  • Eaton (ETN), an industrials player specializing in power management, scores well for its human capital development efforts, diversity programs, and attention to health and safety.
  • PepsiCo (PEP), one of the world’s largest food and beverage companies, stands out for its diversity programs, human rights and freedom of association policies, and responsible marketing practices.

Meanwhile, some prominent stocks don’t make the cut.

  • Wells Fargo (WFC) and Equifax (EFX) are not compliant with the UN Global Compact principles.
  • Raytheon (RTX) and General Dynamics (GD) are excluded because of their involvement in riot control-related products and Philip Morris (PM) because of its association with tobacco.
  • Mega-caps Berkshire Hathaway (BRK) and Procter and Gamble (PG) did not receive sufficiently high scores across indicators to make the index roster as of the December 2020 reconstitution.

Should DEI Matter to Investors?

For many, DEI is simply the right thing to do. But there are also business reasons to care. McKinsey research has shown that companies serious about diversity and inclusion achieve superior financial results. “Cognitive diversity,” which results from mixing backgrounds and perspectives, fosters creativity and improves decision-making. DEI has also been linked to brand building, customer alignment, and talent acquisition and retention.

Although the Morningstar Minority Empowerment Index, launched in 2018, has a limited track record, it is instructive to evaluate its exposure to risk factors, or sources of return that could indicate future behavior.

According to the exhibit below, leveraging the Morningstar Global Risk Model, the index has higher exposure than its benchmark to the Economic Moat factor. Economic moat is Morningstar’s measure of corporate quality or sustainable competitive advantage. It’s assigned by Morningstar equity analysts, extended by an algorithm to broaden coverage. Morningstar has observed that portfolios with heavy economic moat exposure, or strong corporate quality, provide superior downside protection.


The index’s preference for high-quality companies supports the conclusion that diversity, equity, and inclusion is not just a human rights issue but also a matter of good business practice. Companies committed to DEI benefit from cognitive diversity, and they tap into the full range of human capital that the labor force offers. In today’s knowledge economy, that’s critical.

Dan Lefkovitz is a strategist on Morningstar's Indexes team.