You want outperformance? Gender diversity good for results and economies

The ‘E’ component of ESG garners the most attention, says Rachel Winter, but one aspect of the ‘G’ strand that has risen in prominence of late is gender diversity.

ESG (Environmental Social Governance) investing has experienced notable momentum in recent months, with companies that boast good ESG characteristics now trading on sizeable premiums to the wider market.

So far it appears that the ‘E’ component of ESG has garnered the most attention, probably because climate change fears have heightened in recent months. It can also be argued that the environmental category is more easily defined and measured than the social and governance categories. Carbon emissions, recyclable packaging and use of renewable power are all quantifiable, whereas defining and measuring a company’s social impact and governance are a bit more subjective.

However, one particular aspect of governance that has risen in prominence of late is gender diversity. Momentum is building behind so-called ‘gender-lens’ investing, where companies are scored on the basis of the gender diversity of their workforce.

Between 2014 and 2018, the global level of investment in funds with a gender-lens mandate grew from $100 million to $2.4 billion. Major institutions are launching new funds in recognition of the demand. Legal & General launched the Future World Gender in Leadership GIRL fund in September 2018 and Fidelity launched the Women’s Leadership fund in May 2019. A longer-running fund in this space is the PAX Ellevate Global Women’s Leadership fund, which has outperformed the MSCI World index over both a three-year and a five-year timeframe.

Investment trusts lag FTSE companies on gender diversity

Why gender-lens mandate boosts performance

These funds select companies based on a variety of factors, including the percentage of female board members, percentage of females in senior management positions, parental leave policies and evidence of long-term retention of female employees.

Why does diversity lead to better performance? It’s thought that a more diverse workforce will be capable of generating more ideas and is therefore likely to display a greater level of innovation. Employees who think in different ways are also more likely to challenge one another, which leads to problems being identified earlier. Data relating to diversity is becoming more widely available as more companies seek to measure and promote it; gender diversity in particular has been encouraged by various governments around the world.

The reporting of the gender pay gap in the UK became compulsory in April 2017 for companies with over 250 employees, and awareness of the issue has increased since then. In 2019 the UK gender pay gap was 17.3%, down from 17.8% in 2018.

The FTSE 100 companies are on track to ensure one third of boardroom seats are filled by women by the end of 2020, although the number of female chief executives is still disappointingly low. Firms with no women on their boards have been heavily criticised, with FTSE 250 property business Daejan Holdings drawing significant levels of negative press owing to the fact that it has never had a woman on its board in its entire 85-year history.

Wider economic benefits

There is an increasing number of studies that highlight the wider economic benefits of a more gender-diverse workforce. The PwC Women in Work Index has analysed the issue extensively on a global basis. The gender pay gap is only one part of the issue. A large pay gap with lower pay for women reduces the likelihood of women returning to the workforce after having children.

Moreover, a low level of female participation in the workforce has negative connotations for the wider economy. PwC’s report puts forward the view that economic output can be increased with higher levels of female participation. Sweden is known for its high level of female participation in the workforce, and the report aims to estimate the extent to which other countries could benefit if they were able to reach Swedish levels. The UK could boost its economic growth by 9% if it could match Sweden, and across the OECD as a whole the potential GDP gain is higher at 12%.

However, the greatest potential gains are available to non-OECD countries. India, for example, has a very high gender pay gap of 36% and a very low female participation rate. Boosting this employment rate to Swedish levels could generate a huge GDP increase of US$7 trillion (£5.4 trilion).

Investing in companies with good levels of gender diversity therefore makes sense on two levels. There is evidence that the individual companies will outperform, and furthermore these companies are likely to be having a positive economic impact on the economies in which they are operating.

Rachel Winter is an associate investment director at Killik & Co.

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