Image by designer Jordynn McKnight for the World Economic Forum, Global Gender Gap Report (2021)

Gender Lens is Emerging as a Fundamental ESG Screen

By Jennifer Coombs, College for Financial Planning

Above image by designer Jordynn McKnight for the World Economic Forum, Global Gender Gap Report (2021)

 

Jennifer Coombs-College for Financial PlanningContrary to the anticipation of some market skeptics, the popularity of the use of environmental, social, and governance (ESG) screens for investments has continued to surge over 2021. The use of ESG integration has been touted by many Wall Street firms as a useful method for identifying risk factors that would otherwise be overlooked by traditional investment analysis, as well as optimizing investment returns in times of economic uncertainty. However, in the absence of oversight from the Securities and Exchange Commission, as well as general international standards for identifying optimal ESG screens, investment firms are now faced with addressing accusations of “greenwashing” (giving the impression that an investment is sustainable but cannot provide information or proof that it is).

Those firms that recognize the reputational damage that can be attributed to greenwashing have sought to develop new screens for investments and provide details as to how these screens are implemented. The most challenging of these screens, and often the last to be addressed, are those in the social (S) category. Social issues are rather broad and are often difficult to quantify, yet there are some issues that are emerging as the front runners in strong social screens. One of the simplest, yet most profound of these screens is the “gender lens” for investment.

Based on emerging societal norms, it would make sense to put equality for women at the forefront of investing, however it goes much deeper than a societal nicety; organizations that prioritize the rights and equality of women make their own organization stronger in general. Those companies that rank higher from an ESG perspective for embracing the gender lens for investments also help to optimize the returns on their investments as well.

Characteristics of the Gender Lens

According to the Global Impact Investing Network (GIIN), gender lens investing takes into consideration factors that help to advance gender equality and better inform investment decisions. They categorized two broad approaches to using gender lenses for investments, however the total number of screens are not limited to just these.1

One can invest for the purpose of addressing gender specific issues or promote gender equality by investing in:

  • Women-owned/led businesses
  • Enterprises that promote workplace equality (such as board representation or staffing processes)
  • Companies that offer products or services designed to substantially improve the lives of women and girls around the world.

Additionally, investors can use the following screens to address investment decisions:

  • Use a process that focuses on gender from pre-investment activities to post-deal monitoring (i.e. corporate strategies that promote equality and continue to monitor it)
  • Look to invest or do business with organizations who have a vision, mission, or organizational structure designed to address gender issues
  • Use data and metrics for gender-equitable management and find ways to incentivize changes in organizational behavior and accountability
  • Invest in firms that identify clear commitments and steps to advancing gender equality.

The Gender Gap is Slow to Improve

Women account for more than half of the global population but are massively underrepresented in the workforce. Underutilizing half the population means that organizations, and economics, are at a major disadvantage when diversity and equality is limited. On an annual basis, the World Economic Forum (WEF) measures the global gender gap, which is the difference between men and women as reflected in social, political, intellectual, cultural, and economic attitudes and attainments. The WEF’s Global Gender Gap Index shows the percentage of the gender gap closed as of 2021, and unfortunately on the whole, a little over two-thirds of this gap has been closed. On the other hand, political representation by women as well as economic participation have a long way to go before equality is obtained, with a gap of 22% and 58%, respectively.2 The figure below shows the percentage of the gender gap closed to date for selected subindexes.

Global Gender Gap Index - World Economic Forum 2021

Of the 156 countries measured by the study, the United States ranks 30th with an overall gender gap index of 76.3%. However, even the most gender-equitable country on Earth (Iceland) still possesses a gender gap index of 89.2% – this indicates that there is still a long way to go until equality is reached. Until this happens though, there are plenty of opportunities for investors to be a part of this growth.

The Importance of the Gender Lens for Investment Performance

According to research, women need to hold three or more seats on a board of directors in order to create “critical mass,” which in turn leads to better financial performance.3 In 2019 in the United States, only 56.2% of companies were reported has having three or more women on their board of directors.4

Additionally, gender-diverse companies have a propensity to outperform those that are less diverse, and diverse perspectives can translate into increases for a portfolio’s bottom line. According to a Morgan Stanley research report from 2019, a more diverse workplace has a positive correlation with higher average returns and overall lower volatility. From 2011-2019, companies with higher gender diversity experienced a one-year return on equity that was 2% higher than companies with low gender diversity, and companies that take a holistic approach toward equal representation of women outperformed their less diverse peers by 3.1% per year.5

So why exactly does gender diversity lead to outperformance? It is theorized by Morgan Stanley that corporate practices which advance and utilize the talents and skills of women workers translate into a stronger bottom-line. These positive externalities include, but are not limited to, employee satisfaction, the ability to recruit new talent, promoting innovation, addressing blind spots, and avoiding reputational risk.

Financial Advisors Need to Keep Up

As ESG screens reach a greater level of maturity and standardization, financial advisors need to recognize how to use emerging screens in their practices. The gender lens may seem simple enough, but its strength in identifying strong investments cannot be understated. Education is key with any emerging sector and the Chartered SRI Counselor designation program is an excellent way to stay up-to-date on important screens and strategies for sustainable investing practices. The 5th edition of the course will release in June 2022, and will include education on understanding and using the most commonly used ESG lenses for stronger investments.

 

Article by Jennifer N. Coombs, who is the creator, lead author, and lead instructor for the Chartered SRI Counselor™ (CSRIC™) designation program developed in partnership with US SIF as the first professional financial education program in the United States exclusively devoted to sustainable investing. She has given two TED talks on the topic of sustainable and responsible investing: “Investing for a Better World: Using Wall Street to Implement Social Change” (November 2015 at TEDx Jersey City), and “Stopping the Rebuttal: Millennial Investors and the Future of Sustainability” (April 2018 at TEDx Clarkson University).

She is sought out for her expertise on ESG education and market outlooks, and has been quoted in The New York Times, The AP, Market Watch, Investment News, Money Magazine, Citigroup, GreenMoney Journal, Financial Advisor IQ, RIABiz, Wealth Management, and Proactive Advisor Magazine. Jennifer Coombs holds a Master of Science in Finance and is a member of the ESG Advisory Board at Investment News and serves on the education committee of US SIF. She lives in her home state of Vermont.

Footnotes:
[1] Gender Lens Investing Initiative from the Global Impact Investing Network (GIIN), (2019) https://thegiin.org/gender-lens-investing-initiative
[2] World Economic Forum, Global Gender Gap Report (2021) https://www3.weforum.org/docs/WEF_GGGR_2021.pdf
[3] Cynthia Soledad, Karoline Vinsrygg, Ashley Summerfield, and Jennifer Reingold, 2018 Global Board Diversity Tracker: Who’s Really On Board? (Egon Zehnder, December 2018): p. 11. https://www.egonzehnder.com/global-board-diversity-tracker
[4] https://www.catalyst.org/research/women-on-corporate-boards/
[5] Refinitiv, FactSet, Morgan Stanley Research; Based on an Equal weighted average 12M forward return for the North America Top 1/3 fractile of HER score versus the excess equal weighted average 12M forward return for the region, 2011-5/2019; cited on https://www.morganstanley.com/access/gender-diversity

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