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Why Gender Diversity May Lead to Better Returns for Investors

Gender diversity at work and investing in equality for women can actually increase a company’s—and your portfolio’s—bottom line. Our expert explains.

We are in the midst of an awakening -- women speaking up for themselves about inequity and mistreatment and through their brave actions catalyzing social change. As a sustainable and impact investor, I’ve been thinking about how we can use our investment dollars to increase equality for women. I’m heartened to see real momentum around gender diversity and inclusiveness across all industries. I care about this conversation as the mother of a daughter, but I also think it’s important for society as a whole.

To me, gender diversity means a balance in representation across all genders, including women, in conversation and action. It does not mean pushing men out. Inclusion and diversity can broaden perspectives and drive better decision-making.

As it turns out, these practices can actually increase your portfolio’s bottom line.

Gender diversity isn’t just about getting qualified women into the C-suite and the boardroom, although representation at the highest levels is incredibly important. It is also about equality across all levels and types of industry. To invest in this manner, a creative approach is needed. For example, as someone whose job is to create impact investing portfolios, I try to extend our thinking to sectors such as agriculture and affordable housing because an outsized number of women identify agriculture as their primary source of income, especially in developing countries, and affordable housing issues disproportionately affect single moms. At Morgan Stanley, we ask ourselves: What are the products and services that will help improve women’s and children’s lives?

I recently had the opportunity to attend the 2018 MAKERS conference in Los Angeles alongside an inspiring group of powerful women across business, politics, and Hollywood.  There I heard women lifting each other up through words of encouragement, bound together by the seemingly insurmountable challenges all had faced in their careers and family life.  I heard from the founders of Time’s Up, a group of powerful women in entertainment who have pledged to provide legal services for women across industries where they have faced mistreatment, such as the hotel industry. In speaking to the strength of the movement, Time’s Up member Rashida Jones said, “There is no change unless you bring every single person along who has spent time being marginalized—whether that means you are a person of color, a woman, or a disabled person.”  This is what motivates me—to create a more just and equal world for everyone through our investment dollars.

Investors Are Changing Corporate Behaviors

Change is happening as investors demand greater transparency and gender inclusiveness. Unlike in certain European countries where company boards are mandated to include a specific percentage of women, the U.S. movement toward gender equity isn’t being driven by the government or public-sector pressure. Investors, like you and me, are catalyzing this movement by making demands of the companies with which we do business.

The reasons are twofold: Create a better world and also create better-performing, more innovative companies. 

Gender-Diverse Companies Actually Outperform, on Average

According to Morgan Stanley Research, a more-female workforce is correlated with higher average returns. When our quantitative team looked at companies based on their percentage of female employees and other metrics of gender diversity, the top third experienced 2% higher average relative returns than other companies in their region. Over a six-year period, companies with more gender diversity enjoyed a one-year return on equity that was 1.1% better than companies with low female representation. Evidence has linked gender diversity to lower return-on-equity volatility, too.

Gender equality can reverberate throughout the global economy, especially in countries with aging populations such as the U.S., Europe and Asia. By one estimate, higher female participation and employment rates could lead to a GDP gain of about 6% by 2030.

Why Does Gender Diversity Translate to Outperformance?

A few possible reasons:

  • Employee satisfaction: Diversity broadly and gender diversity specifically have been shown to correlate with superior performance in terms of employee engagement. Interestingly, there seems to be a statistically significant relationship between diversity practices and employee engagement at work, for all employees, not just women. Happy workers create better products. Plus, it’s significantly more expensive to onboard new employees than to retain existing employees, so simply keeping your workforce motivated and engaged can add to a company’s bottom line.  
  • Better recruiting: Family-life balance, flexible working programs, and maternity and paternity leave are drivers of outperformance for many reasons, including helping companies in competitive markets attract top talent. This gives companies an edge in hiring the workers they need—especially in countries that are experiencing an aging and shrinking workforce.
  • Innovation: A more diverse perspective can improve team decision-making and innovation capabilities for new products and services. If everyone sitting around a board room has similar experiences and perspectives, that could create unintentional blind spots in decision-making.
  • Appealing to a more diverse customer base: If men are trying to create products for women and girls, they may not be as successful as a roomful of employees who better understand their customer base. Reaching out to new markets can add new revenue sources for a company. 
  • Reputational risk: We pay attention when companies experience controversies over issues such as big pay gaps, wage disputes, sexual harassment litigation, equal opportunity litigation, and so on. While these issues can happen at diverse workplaces, many investors like to see companies have strong records of supporting women.

Impact investors have powerful tools at their disposal to make a difference, including within the Morgan Stanley Access Investing portfolios.  

Many aspects of society are changing and seem out of our control—gender diversity is one shift for the better that we can help influence through our personal investments.

Ready to invest in what matters to you?