Credit Suisse

12.16.13

They’re Here. They’re Investable. Get Used to It.

Credit Suisse launched the Credit Suisse LGBT Equality Portfolio the first-ever product that allows clients to invest in companies with LGBT-friendly policies.
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This June saw not one but two watershed moments in the struggle for gay rights in America. In separate rulings that month, the Supreme Court cleared the way for same-sex marriage in California and also struck down the widely reviled Defense of Marriage Act. But long before those decisions—perhaps even paving the way for them—a quieter gay rights battle was being won in the American workplace, as a growing number of companies today are paying attention to treating their lesbian, gay, bisexual, and transgender (LGBT) employees the same way as their straight peers.

In fact, the Human Rights Campaign’s (HRC) Corporate Equality Index—which rates companies on their treatment of LGBT employees—saw 252 companies score a perfect 100 in 2013.  When the advocacy group launched this Index in 2002, only 13 companies did.

All of this hasn’t happened by chance. HRC, for starters, has provided companies with a roadmap on how to achieve equality. Additionally, over the last decade, consumers who care about LGBT rights have been using the HRC index to learn about companies supportive of LGBT-friendly policies. But investors haven’t had an easy option for doing something similar, such as purchasing an investment vehicle comprised solely of high-performing, LGBT-friendly companies.

“An investable portfolio of LBGT-supportive companies launched by a major Wall Street firm would have been unthinkable a decade ago.” —John Lake, The Human Rights Campaign (HRC)

In response to growing investor interest in such vehicles, Credit Suisse launched in October an LGBT Equality Portfolio believed to be the first-ever product that allows clients to invest in a suite of companies that have a demonstrated track record of supporting LGBT employees while also being attractive when measured by traditional valuation approaches, including forward price/earnings ratio, dividend yield and growth rate, and estimates of the stock’s potential upside.

“We believe that companies that engage in and have good top-level policies regarding LGBT employees should see a positive bottom-line economic impact as a result,” said Eric Berger, a Relationship Manager for Credit Suisse’s Private Banking USA business and a member of the firm’s LGBT Network, which played a critical role in the product’s development over the course of the last two years.

To design the product, Nicole Douillet, a trader at Credit Suisse who is also the co-chair of the LGBT Network, first put together a market capitalization-weighted index of LGBT-friendly companies based on the HRC’s corporate ranking. In its current iteration, the non-tradable Credit Suisse LGBT Equality Index consists of about 200 companies with a score of 80 or above on the HRC’s Corporate Equality scorecard. All but a few are in the S&P 500.

The next step was to create an investable, optimized instrument. To that end, Credit Suisse’s HOLT team—which evaluates individual companies for clients ranging from hedge funds to wealth managers—selected from a list of LGBT-friendly companies with a score of 80 or above the stocks that they believe are good investment ideas based on more traditional measures.

To be clear, having LGBT-supportive policies in and of itself does not make a stock (or a portfolio) a sure buy.  But socially conscious investors looking for broad exposure to equities could find a possible option by choosing a diversified basket of LGBT-friendly companies, especially given the LGBT Equality Index’s more than 99-percent correlation with the S&P 500 Index.

The “business case for diversity” does have an inherent logic. After all, a more welcoming workplace should lead to some economic benefit, shouldn’t it? To find out, Credit Suisse sponsored a study by the Williams Institute, a think tank at the University of California, Los Angeles Law School, the findings of which were published in a May report entitled “The Business Impact of LGBT-Supportive Workplace Policies.”

According to the study referenced above, researchers found plenty of evidence that such policies do have positive impacts. Some are straightforward, such as increased job satisfaction and greater job commitment among LGBT employees. Some are less so, including increased productivity.

The not-so-good news: There was little indication that such policies actually improve profits by boosting revenues or reducing costs, which could, in turn, affect equity prices. Researchers did find one study that showed the stock prices of companies with stronger LGBT policies performed better than their peers over the course of four years, but another one showed that companies listed on the HRC’s Corporate Equality Index enjoyed a slight bump in their stock prices immediately after the report came out only to see the halo effect disappear within three days.

The study’s strongest finding was that employees were more likely to be open about their sexual orientation at companies with supportive policies. “Most of us like to keep pictures of our family at work,” said M.V. Lee Badgett, a distinguished scholar at the Williams Institute and director of the Center for Public Policy and Administration at the University of Massachusetts Amherst. “And workplace conversations do include trading stories about what we did over the weekend; these are the glue that holds a workforce together.” Still, a survey by the Center for Talent and Innovation think tank last year showed that 41 percent of white-collar, college-educated LGBT workers are still closeted at work. That’s an improvement from 48 percent in 2011, but there’s still another 59 percent to go.

The Williams Institute study also suggested that companies without firm non-discrimination policies and equal benefits will find it challenging to recruit highly qualified LGBT candidates, as one study showed that around 90 percent of LGBT survey respondents said it was important to them to work for a company with those rules in place. That might seem obvious. Here’s something that may not be: they will miss out on hiring highly qualified non-LGBT candidates as well.  One 2006 poll cited in the review showed that 72 percent of straight respondents said it was important to work at a place with a non-discrimination policy. “The younger generation looks at potential employers through a lens of overall social responsibility,” said HRC Director of Corporate Development John Lake.

In that vein, Badgett suggested that the increase in LGBT-friendly workplace policies has had a ripple effect that goes far beyond the employees who are directly affected by the policies. And, in her opinion, the real foundation of an argument for equality was laid when LGBT employees successfully lobbied their human resources departments and chief executives for equal benefits and non-discrimination policies. If the private sector could treat people equally without profits imploding, why couldn’t the government? “I think it really solidified support for equality,” said Badgett. Many corporations have now openly joined the fight. Last year, a number of them—including Amazon, Nike, Starbucks, and Credit Suisse—signed an amicus brief arguing that the Defense of Marriage Act hampered their ability to recruit the best possible employees.

Of course, the struggle in the workplace is not over. There’s a reason the HRC is still publishing its corporate rankings—and that’s because plenty of companies have yet to make the grade when it comes to equal treatment. And, as of now, in many places, there is no legal requirement to change their ways. There is no federal law prohibiting employers from discriminating against their LGBT employees, and the HRC says that number of states lacking specific laws banning discrimination against employees or job applicants based on sexual or gender orientation stand at 29 and 34, respectively.

There’s nothing wrong with a company putting an LGBT-supportive policy into place not simply because it's the right thing to do, but also because it might just have an economic benefit as well. The same goes for a portfolio of stocks.  “I don’t think this would have been imaginable a decade ago,” Lake said, referring to the launch of an investable portfolio focused on LGBT-friendly companies. “I think it signifies a broader social change that has been brought about by organizations like the Human Rights Campaign and others in the LGBT movement that Credit Suisse sees this not only as potentially profitable, but also the right thing to do.”

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