Investors Need to Look for Gender Diversity Outside C-Suite

Broader criteria required by gender-lens investment vehicles, covering diverse talent pools, company policies and the gender pay gap.

Given that half of the global population is female, gender diversity should be the easiest diversity issue to address. Despite the advances celebrated by International Women’s Day on March 8, progress on gender diversity remains slow, experts point out. Investors looking to allocate capital to redress the balance have their work cut out.

The United Nations’ fifth Sustainable Development Goal (SDG) aims to achieve gender equality and empower all women and girls. Success depends in part on investors, asset managers and policymakers actively promoting gender equity as part of a transition to a more sustainable and equitable economy.

A gender diverse workforce also offers financial benefits to companies, making them more attractive investments for investors. According to a 2019 survey by S&P Global, financial firms with female CEOs and CFOs saw an average 20% increase in stock price momentum two years post-appointment. Female CFOs saw a 6% increase in profitability and 8% larger stock returns over the same two-year period.

“We believe there is a correlation between a company’s level of gender diversity and its success––which is supported by growing amounts of research,” say Julie Bech and Audhild Aabø, portfolio managers of Nordea Asset Management’s Global Gender Diversity Fund.

“Human capital is a key factor behind a company’s profitability, and it is difficult for a competitor to copy the skills of outstanding employees.”

Investable companies with strong gender diversity remain few and far between, according to the World Benchmarking Alliance (WBA). In its SDG2000, which identifies and assesses the 2,000 most influential companies globally on their gender diversity, the WBA found that an average of 21% of directors and 15% of executives are female.

According to Hedda Pahlson-Moller, CEO of sustainability and impact investing solution provider TIIME, investors need to focus on more clearly understanding the value of gender diversity in their portfolios.

“Investors need to stretch their imaginations quite far when it comes to gender smart investing. [As an impact investor], my personal investment journey across asset classes is defined by wanting to avoid harm and the ambition to contribute to solutions for gender equality,” she said at the Sustainable Investor Summit (SIS) Online last year.

Investment criteria for gender-focused funds

Gender-focused funds are a key way in which investors can directly invest in companies that prioritise gender diversity, says Bob Jenkins, Head of Research as Refinitiv Lipper.

“[Investors are] seeking companies that are leaders in the reduction of the gender gap, have a high representation of women in management and/or demonstrate a strong commitment to adopt and implement ‘women-friendly’ policies,” Jenkins explains.

This is the criteria adopted in the Mirova Women Leaders Equity Fund, which has US$170 million AUM and is therefore one of the largest gender-led equity funds, according to a recent Parallelle Finance report.

“Our quantitative analysis examines and assesses the percentage of women on the executive board, whether the company is run by a woman (CEO/CFO) and the balance between female representation in the overall headcount and within the executive committee,” says Soliane Varlet, Mirova’s strategy manager for the fund.

This process is supported by a qualitative assessment, which Varlet notes is important to understand the “relevance and effectiveness of diversity policies set up within the companies”.

“For example, our attention will be drawn in particular to the implementation of leadership programmes designed to boost women’s access to top management roles, trends in internal promotion rates or paid parental leave,” she tells ESG Investor.

While these criteria present investors with a clear view of diversity within companies selected for a fund at a c-suite level, gender-related data throughout lower rungs remains shrouded.

“Getting access to some of the more granular information around gender equity practices at companies is not straightforward when considering industry and regional differences in such things as pay, benefits and work environments,” Jenkins says.

Gender diversity beyond the c-suite

To understand whether a company is truly gender diverse, investors should seek evidence across the entire value chain, from workplace to suppliers, marketplace and community, says Shamistha Selvaratnam, Gender Lead at WBA.

“We see companies focusing their gender efforts on one or two aspects of their value chains. In many cases they only look at what is happening at the workplace level,” says Selvaratnam. “To truly drive gender-transformative change, companies need to understand their gender impacts across their whole organisation context.”

While a key part of understanding a company’s gender diversity, Chloe Horne, Stewardship Analyst for the Principles for Responsible Investment (PRI), says the number of women on boards should be taken with a grain of salt. Investors should look to see that women appointed at a board or executive level have been recruited from a broad pool of candidates.

“When companies appoint the same handful of women, we know this leads to a select handful of women with multiple positions on boards, but not necessarily an increase in the number of women on boards. This also highlights the importance of companies developing a diverse talent pipeline which will feed into leadership positions later down the line,” Horne says.

Mixed messages in tech sector 

A focus on c-suite-level gender diversity by investors has led to technology companies’ commonly being included in gender-focused funds, as they often have a healthy gender mix in top roles, Jenkins reveals. This is despite the fact tech firms have been called out for unfair pay or promotion in the middle and lower ranks, he adds.

He points to Microsoft as an example. “They have decent board diversity and some women and minority representation in high-profile management roles, but their diversity and inclusion record in the lower ranks is well below broader averages for large companies.”

Microsoft is included in Nordea’s Global Gender Diversity Fund, Bech and Aabø say, partly on the grounds that its board of five women and seven men meets their criteria. “Microsoft has been proactive to improve in this area over recent years, such as providing enterprise-wide diversity training,” they add.

The tech giant’s wider ESG commitments – such as pledging to be carbon negative by 2030 – also stands it in good stead as an ‘ESG-friendly’ investment.

Nonetheless, it is important to note that wider issues around data privacy, tax avoidance and human rights have been flagged as prevalent problem areas for several Big Tech, including Microsoft.

The Parallele Finance report shows Microsoft is held by six of the top 10 gender-lens equity funds, with three holding Amazon, two holding Adobe and two holding Alibaba. Facebook, Netflix and Google are also held by these top 10 funds.

“Tech companies have a way to go before they can claim gender equality, particularly as it relates to pay practices and middle management representation,” he says.

SDG 5 alignment hindered by climate focus? 

Just 15 ESG exchange-traded funds (ETFs) expressly align with SDG 5, managing over US$996 million in total AUM, according to data provided by TrackInsight’s ESG Observatory platform.

Considering the fact that 207 (41%) of the 549 ESG-labelled ETFs specifically align with at least one of the UN’s 17 SDGs, gender equality remains a low-down priority, with climate taking centre stage.

However, Varlet argues aligning with SDG 5 is becoming an increasing priority for investors. To monitor companies’ progress, WBA plans to launch a Gender Benchmark in 2021, which will measure contribution to SDG 5, in order to accelerate company progress in closing the gender gap.

Taking an industry-specific approach, the Gender Benchmark has so far been applied to the apparel industry. Assessing 36 apparel companies, the report noted that they disclosed less than 40% of the information needed by stakeholders to understand how closely they align with SDG 5.

However, with COP26 scheduled in November 2021, the focus undeniably remains predominantly on climate, to the detriment of social issues such as gender equity.

“While companies are acutely aware of sustainability factors, often most of the emphasis remains on the environmental elements and less on social and governance,” Bech and Aabø tell ESG Investor. “As understanding of sustainability evolves, we expect more focus to be paid to the non-environmental ESG factors, such as diversity.”

Diversity within delegations responsible for addressing climate change leaves much to be desired. More than 100 recognised climate leaders in the UK wrote an open letter to the COP26 leadership team in December last year outlining the lack of women on the team, even though gender diversity was made a priority in the Gender Action Plan––originally championed by the UK government at COP25.

The signatories cited the lack of female representation as a barrier to effectively implementing policy responses to climate risk. They asked the UK government to “ensure climate finance is gender inclusive (developing minimum standards) to increase accessibility to finance for women-led and women’s rights organisations addressing climate change impacts on the front line”.

Key to driving financial performance

Selvaratnam would like to see investors asking investee companies to broaden their focus of gender-related issues, as well as looking beyond the executive level when assessing gender diversity.

“Companies must consider the broader context and the many dimensions affecting gender equality, including representation, compensation and benefits, health and well-being, and violence and harassment,” she says.

Policymakers have a role to play, too, particularly following on from the economic impact caused by the Covid-19 pandemic, a Moody’s Investor Service research report has said. Policymakers should work alongside investors to ensure companies implement better diversity across all tiers of the business structure, Moody’s emphasised.

According to global management consulting company McKinsey and Company, the pandemic had “a near-immediate effect on women’s employment”. One in four women considered leaving the workforce or ‘downshifting’ their careers versus one in five men.

The three major groups of women most impacted by the pandemic are working mothers, women in senior management positions and black women, McKinsey said.

“Fundamental social policies, particularly with regards to women’s access to education and employment, are more likely to create enduring change,” the report added.

In light of this, Moody’s noted that there will likely be an increase in government policies that “target female economic security” in order to make sure female labour and income disparities don’t worsen in the aftermath of the pandemic.

“But recovery policies alone will not be enough to address existing gaps. Fundamental social policies, particularly with regards to women’s access to education and employment, are more likely to create enduring change,” the report said.

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