Diversification versus Diversity

From Open Risk Manual

Diversification versus Diversity

Diversity is a state of an organization or ecosystem of being diverse (including entities that are different in some respect). It can be considered as the result of a diversification process.

Diversification is in contrast a flux, a process that is ongoing in time. Depending on the context, it may be a natural process or the result of an explicity strategy. It is a term very commonly used in the context of Portfolio Management, thus primarily refering to contracts and securities.

Context

Social Diversity

Diversity in sociology and political studies[1] is the degree of differences in identifying features among the members of a purposefully defined human group, such as racial or ethnic classifications, age, gender, religion, philosophy, physical abilities, socioeconomic background, sexual orientation, gender identity, intelligence, mental health, physical health, genetic attributes, personality, behavior or attractiveness.

Social diversity has not been explicitly considered as a Risk Factor in formal risk management frameworks. The primary areas where the role of individuals on organizational Risk Profile are discussed are Key Person Risk and Risk Culture. In the context of Sustainable Finance reducing inequality is explicity part of the Sustainable Development Goals.

Biological Diversity

It is now also recognized that corporations and financial institutions have an impact on biodiversity. The majority of the impact from financial system intermediaries is not through its own operations, but rather through investments, insurance and loans to companies and households[2][3], [4]

Measuring Diversity

There is a wide variety of methodologies available for measuring diversity (or equivalently, Concentration). The methodologies range from simple (fractions) to more elaborate (See list of Concentration Indexes).

Measuring Diversification

Measuring diversification means essentially the measurement of the rate of change of diversity. It can use the same tools as measuring diversity but applied to the changes of concentration over time.

Diversity Benefits

One of the central tenets of Risk Management is that diversity reduces Risk (See Diversification Benefit).

Issues and Challenges

  • Pursuing a diversification strategy is not always obvious the dominant approach.

See Also

References

  1. Wikipedia
  2. Natural Capital Coalition, 2018
  3. Mulder & Koellner, 2011
  4. The Sustainable Finance Platform, Biodiversity Opportunities and Risks for the Financial Sector, Working Group Biodiversity, June 2020

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