S&P 500 companies that are more diverse and inclusive see better results and have lower risk, a new report by BofA Global Research says. Specifically, gender diversity on boards and among managers correlates with a higher return on equity (ROE).

“We see empirical evidence that companies with superior scores on workforce and board diversity experience higher ROE and lower earnings risk than lower-ranked peers," the authors wrote in a report published Wednesday.

Using public workforce data and AI-driven datasets from Revelio Labs, the bank’s ESG team found that diversity within S&P 500 companies and on their boards led to better performance.

For instance, companies with at least 30% of women in management positions have “seen a bigger median improvement in annual ROEs over this period,” the authors stated.

And S&P 500 companies where at least 25% of their executives were female saw consistently higher subsequent 1-year median return on equity since 2010, the authors stated.

Representation on boards matters specifically: The bank’s “ESG team finds that S&P 500 companies with above-median gender diversity on their boards see 15% higher ROE, and for companies with ethnic and racially diversified workforce, this is 8% higher.”

Gender diversity also reduces risk of earnings volatility.

[See also: Continued racial inequality could cost the U.S. economy more than $1 trillion over the next decade: BoFA]

For instance, if a company had more women in management than the median, they saw a 30% higher ROE, as well as a 30% lower earnings risk over the next year, as compared to those their counterparts with fewer women in management than the median, said BofA.

If they had more women on their board than the median, they saw 15% higher ROE, as well as a stunning 50% reduction in earnings risk one year out, as compared to their less diverse counterparts.

Across most sectors, board diversity essentially was an “effective signal of improving ROE in almost all sectors,” they said.

But there’s still a long way for companies to go: In 2020, women only made up 27% of the average S&P 500 board, the authors said. While this is up from 14% a decade ago, it’s only slightly above 2019’s level, they added.

Less than a dozen companies in the S&P 500 have at least 50% female boards, the report found. Only 8 — less than 2% of the S&P 500 — have management teams that are at least 50% female.

In terms of leadership, less than 5% of S&P 500 companies are run by a female CEO or equivalent. The number of female execs at S&P 500 companies averaged at 18% in 2020.

While new female CEOs haven’t outperformed new male CEOs, new female CFOs outperform new male CFOs by an average of 7 percentage points, the authors noted, as seen in the chart above.

Ethnic and racial diversity

S&P 500 companies could also boost performance by attracting more people of color, the BofA authors found.

For instance, S&P 500 companies that employed more than 33% of people of color have enjoyed a ROE of more than 1 percentage point than their peers in the subsequent year on average.

They also experienced a “touch lower” forward earnings-per-share volatility than their counterparts in the following year, as compared to their less diverse counterparts.

Companies that have “above-average ethnic and racial diversity” among employees also saw a 8% higher ROE one year out, as compared to less diverse peers.

But only three in the S&P 500 have a board that’s made up of at least 40% of people of color.

After Merck CEO Ken Frazier retired this February, only three Black CEOs in Fortune 500 companies remain. There are no Black senior execs in the FTSE100. Only one firm in the S&P 500 is run by a Black female CEO: Walgreen Boots Alliance, run by Roz Brewer (she assumes the role in mid-March.)

According to a tracker by the Latino Corporate Directors Association, 74% of Fortune 1000 companies lack a single Latino director on their board.

Diversity mandates to pressure boards

The Nasdaq has also been pushing for more diversity, filing a proposal with the Securities and Exchange Commission that would require most of its companies to have at least one female board member and another that is from an under-represented minority group or is LGBTQ.

In California, which had mandated gender diversity on boards in 2018, the effect of requiring publicly traded companies to have more female board directors if they are headquartered in the state is clear.

Last year, California also moved to mandate that publicly traded companies headquartered in the state must have at least one director who was from a minority community by the end of this year.

Aarthi is a reporter for Yahoo Finance.

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