Supported by Impax Asset Management
The glass ceiling preventing women from equality in business and society hasn’t been fully removed, but the cracks are getting bigger. That is both a function of, and a cause of, ongoing growth in the investment discipline known as gender-lens investing (GLI), which is attracting new money and fresh manager interest as studies increasingly find that companies that are strong in women’s issues tend to outperform those that are not.
The data that GLI investors use to inform their decision-making has improved in recent years, proponents say, though many stumbling blocks remain. But the discipline has momentum that seems likely only to grow in coming years.
Gender equality is “both a moral and economic imperative” and will be a “key driver in the transition to a more sustainable global economy,” says Kelly Baldoni, VP for global women’s strategies at Impax Asset Management, one of the leaders in the space.
Gender-lens investing broadly means screening for, and investing in, companies that are particularly strong on women’s issues. A common data point to look at is gender diversity on a company’s board of directors, or in its C-suite and across senior management. GLI also looks for companies taking proactive steps toward gender equality, like better family leave policies or gender equity among salaries.
The theory driving GLI is that investing in such companies will deliver superior investment returns, while also supporting the advancement of women. Proponents point to ongoing research that they say proves that companies strong on gender diversity do, indeed, perform better as investments.
For instance, a new report from ISS cites a growing set of studies that conclude “higher gender diversity in corporate boards of directors or other high-ranking corporate positions is linked to better market performance and higher financial quality.”
There is no doubt of the benefits of GLI, according to Baldoni. “Research highlighting the business benefits of diversity is robust,” she says. “The research clearly shows that diverse groups bring different experiences and perspectives to the table, which tends to result in better oversight, decision-making and innovation. At the company level, greater diversity tends to lead to better financial outcomes, healthier corporate cultures, more resiliency and even improved environmental impact.”
A gender-diverse board also leads to improved ESG scores. Data provider MSCI crunched the numbers and found that among companies with “sustained board diversity” — that is, at least three female directors who have served for three years or more — one-third of them were leaders in their ESG peer-group categories. That was twice the rate of companies that lack such diversity.
MSCI says those diverse companies tend to have stronger environmental policies, such as linking executive compensation to environmental targets, and “stronger records of reducing carbon emissions than peers lacking sustained board diversity.” Those items feed directly into a company’s ESG score.
All this is driving both inflows to GLI funds and, crucially, improvements in diversity at companies. The ISS report points to a “favorable global trend of new appointees, new leaders, and new disclosures” around diversity and inclusion at public companies, with gender diversity a key part of that. “As more and more data points become available around these topics, the body of evidence supporting the positive impact that [diversity and inclusion] can have on returns grows as well,” ISS says.
As for flows into gender-lens investing, those are up strongly too: GLI funds attracted $4.9 billion in new money in the first nine months of this year, the Wall Street Journal reports, citing data from Morningstar Direct. That was up from $2.9 billion in the same period a year ago. Morningstar counts 52 funds in the gender-lens investment universe.
The number of GLI funds can vary depending on how you look at it, but there’s no doubt that the universe is expanding. In 2018, Veris Wealth Management tallied 35 such strategies, a number that itself was up sharply from 2014, when there were just eight GLI investment strategies in the market.
Among the many strategies available today are index funds or ETFs from providers like Barclays and State Street Global Advisors, a mutual fund from Fidelity, and the Pax Ellevate Women’s Leadership Fund. That fund tracks the Impax Global Women’s Leadership index, which Impax created in 2014 as the first broad-market index of companies that work to advance women’s leadership roles.
The fund invests in companies with good representation of women in leadership positions, both on the board and in senior management, and with proactive policies aimed at improving gender diversity and transparency. “We have seen significant interest and inflows from a broad range of investors, from institutions to individuals,” Baldoni says.
She adds that the Pax Ellevate fund recently reached $1 billion in assets under management, and flows have been driven largely by mission‑aligned foundations and high net worth individuals accessing them through wealth management platforms such as LPL and Morgan Stanley.
Pressuring Companies on Gender Issues
Concurrent with the growth in GLI strategies has been real progress made at some of the companies these funds invest in, especially regarding boardroom diversity and salary equity.
Last year, for instance, Goldman Sachs announced that it would no longer help companies go public unless they had at least one “diverse” board member — a term that can include minorities as well as women. That requirement was raised to two “diverse” members this year, and it must include at least one woman. “We believe that companies with diverse boards of directors are better positioned for stronger financial performance and improved governance,” Goldman says.
Goldman’s stance is in line with a new rule put in place by the Nasdaq stock exchange, which says that any company listed there will soon need to have two “diverse” directors.
And, as KPMG notes in a recent report on gender-lens investing, private equity giants including Blackstone, KKR and Carlyle Group have each agreed to track internal numbers on hiring and promotion by both gender and diversity, and to share this data with investors during fundraising.
More broadly, women occupy more corporate board seats than ever before, with the numbers having “skyrocketed” in 2018 and 2019 due to “mounting pressure from large investors through engagement and proxy voting, in addition to rising interest in new indices that used gender diversity as an investment driver,” ISS says.
Some of that pressure has come from the 30 Percent Coalition, a large group of asset managers, asset owners, and others that advocate for gender and racial diversity on corporate boards. Members include Blackstone, Impax, the California State Teachers’ Retirement System, the New York State Common Retirement Fund, the New Jersey Division of Investment and many others. It claims more than 500 public companies have appointed a female director for the first time in response to the group’s campaigns.
That trend has been strong this year. Of all new board appointments to Russell 3000 companies this year through October, 890, or 44%, have been women, ISS says. The trend is on track to equal or surpass the 1,176 female appointees to Russell 3000 boards in 2019, and the 1,197 appointed last year.
Issues with Data and Disclosure
Despite all these improvements, challenges still exist for GLI managers, with data and information availability being a key one. It’s easy to find out the gender diversity of a public company’s board and its C-suite executives; getting that information on other parts of management can be trickier.
“For asset managers, companies’ reticence to disclose demographic data continues to be a challenge,” Baldoni says. But she adds that American companies have gotten much better at voluntarily disclosing more data points around diversity and pay equity, “which we believe is a signal that companies are beginning to recognize the benefits of transparency.”
The news isn’t as good overseas, though, where “diversity disclosure is expected to remain challenging because of the patchwork of laws and restrictions that prevent companies from disclosing the type of data that is beneficial to investors,” she adds.
As much as possible, managers will continue to push portfolio companies to improve their disclosures, which will help them select the top companies in terms of gender issues. “We hope to see more companies disclose gender and diversity data as well, so that we and other GLI providers can weave it into our gender lens analytics,” Baldoni says.
Even as these challenges persist, more institutional dollars are likely to move into the space, with managers responding with a growing number of strategies. “We anticipate more GLI products coming to market, and we believe institutional and individual investors will begin allocating a larger share of investments to these strategies,” Baldoni says.
And there are no signs of this letting up.
“GLI has strong momentum,” she adds. That is likely to continue “as investors continue to realize the opportunity to capture returns associated with diverse and women-led leadership teams.”
The 5th Annual Invest in Women Symposium, organized by Impax Asset Management, is taking place on Dec 7. Please note: this event is intended exclusively for asset owners (pensions, foundations, endowments, SWFs, family offices), investment consultants, private banks and intermediary advisors only.
During the 2021 Impax Invest in Women Symposium, leading experts in gender lens investing will explore the latest developments plus enduring themes of interest to all who invest in women and equality. This event is designed to help you think critically and creatively about how to invest through a gender lens ― and prepare for the coming groundswell.