Morgan Stanley
  • Research
  • May 11, 2016

Why It Pays to Invest in Gender Diversity

Morgan Stanley has created a proprietary quantitative framework to show that a better balance of men and women in the workplace can deliver returns with less volatility.

Investing in gender diversity at the workplace is profitable for both companies and investors, and Morgan Stanley has the research and quantitative analysis to back it up. 

Moving the debate from the theoretical and into the empirical, Morgan Stanley’s Sustainable + Responsible Investment (SRI) and Global Quantitative Research teams have collected and analyzed data on this issue from around the world, and created a proprietary gender-diversity framework for ranking more than 1,600 stocks globally. This new approach demonstrates that more gender diverse companies offer similar return with lower volatility, with significant implications for investment and corporate behavior.

Calls for more female participation in the economy have grown louder, often based on political or cultural arguments founded on fairness. Yet, a persuasive argument for diversity and equality can also be anchored to the bottom line, where ensuring that more women are working and leading in the workplace is simply good business, especially for investors who not only care about the ethics, but also want returns.

Average Relative Returns: Positive Relationship Between Equity Returns and Gender Composition of Employee Base

Annualized monthly returns relative to region, %women employees ranked into thirds within regional sector MSCI World, Equally Weighted Average Returns, 2010-2015, as of 3/22/2016
Sources: FactSet, ASSET4, Morgan Stanley Research

Global Conundrum

Despite improvements, women are still significantly underrepresented in the workplace, accounting for roughly a third of all employees globally and less than a quarter of management positions. Yet, a company's percentage of female employees is positively correlated with its return on equity, says Eva Zlotnicka, lead analyst on the SRI report, “A Framework for Gender Diversity in the Workplace."

More gender diversity, particularly in corporate settings, can translate to increased productivity, greater innovation, better decision-making, and higher employee retention and satisfaction. “In essence, companies that screen better for gender diversity metrics are higher quality companies using our other standard financial metrics,” says Chief U.S. Equity Strategist Adam Parker, lead on the Global Quantatitive report, "Putting Gender Diversity to Work: Better Fundamentals, Less Volatility."

Their key conclusions include:

  • High gender diversity companies have delivered slightly better returns, with lower volatility, compared with their low diversity or sector peers, and they have moderately outperformed on average in the past five years;
  • The top fifth of selected companies that consistently rank gender diversity among their priorities, with data to back it up, outperformed their peers based on volatility and risk factors;
  • Gender pay gaps for directors and executives have been smaller in North America than in Europe or Asia-Pacific, excluding Japan, over the past 10 years (Japan lacks enough women executives and directors for a reliable assessment of the pay gap);
  • Globally, the pay gap is the highest in the utilities and materials sectors, and nonexistent in staples;
  • In Europe, female representation has increased on boards, but not at the executive, manager or employee levels;
  • Globally, technology has the lowest female representation on boards, whereas traditional defensives typically have better representation.

Tech Has Lowest Share of Women Directors, While Defensive Sectors (Telecom, Consumer Staples and Utilities) Have Highest

Sources: FactSet, ASSET4, Morgan Stanley Research

Mind the Gender Data Gap

The framework and quantitative analysis are just a start, given the dearth of data. Most discussions of diversity or equality focus on the percentage of women on boards, a prominent but fractional part of the story. More than 6,000 companies globally now provide environmental, social and governance (ESG) disclosures, which may include information on women on boards and in the workforce. Nevertheless, “data analysis on the subject of gender diversity remains challenging," Zlotnicka says.

Reported data generally aren’t standardized. “The contents, units and formats can vary greatly across companies or even over time for the same company, making comparisons difficult," she adds. Long reporting lags, up to 15 months after year-end, aren’t uncommon. While human resources departments should have ready access to gender-related data, companies either don't consider this metric meaningful to investors or don't want to expose themselves, particularly when no requirement exists.

Quantitative Gender Diversity Data Generally Lag Behind Qualitative Data Points

Source: FactSet, ASSET4, Morgan Stanley Research

To create a more comprehensive look at gender diversity across organizations, the SRI team built its framework using five major elements: percentage of women in the workplace, presence of women in key roles, equality in pay, company policies that promote equality, and programs that accommodate the needs of women and working parents.

The largest weightings are assigned to the categories of equality in pay (24%) and presence of women in key roles (23%). The female representation among employees, managers, executives, and directors are combined to make up another 20% of the composite model.

“This structure allows us to extract the most insight from the data we have," says Zlotnicka. “Ideally, we would also want to include a sixth element and evaluate companies' influence outside the confines of the organization to change social and education norms."

What It Means for Performance

Using this framework, the researchers can combine gender scores with financial data in Morgan Stanley's global database. “We can do in-depth analyses to link gender diversity to all kinds of company attributes, including growth, profitability, corporate spending and accounting quality," says Jessica Alsford, head of SRI research. Equal representation of the sexes is particularly key for sectors where employee engagement and satisfaction reflects directly on the quality of the product or service—financials, technology, retail, leisure and business services, among others.

In one sample, researchers looked at the relationship between gender equality and return on equity (ROE) over the past six years. The companies with more diversity tended to have a higher level of forward one-year ROE, on average 0.7% better than their regional sector peers and 1.1% above those with low representation of women in the workplace.

The link between company financial performance and gender diversity is the latest in an emerging body of academic and qualitative research that links well-rounded and inclusive work environments with returns. “Gender diversity can improve team decision-making and improve innovation capabilities for development of new products or services," says Alsford. “It can also create alignment with diverse customer bases and, thus, open up untapped business opportunities."

Broader Economic Impact

The importance of gender diversity goes beyond individual company performance; it has far-reaching economic implications. Women represent slightly more than half of the global population. In many countries, however, limited access to education, labor market conditions and cultural attitudes are major barriers to workplace entry. At the same time, women have fewer incentives than men to join the workforce: They are, on average, paid less, face more discrimination, while continuing to shoulder the bulk of responsibility for child- and elder-care and housework.

Yet the impact of increasing female participation to the workforce could be powerful. “The benefits of gender equality are multiple, including increased labor supply; higher incomes, productivity gains, and corporate bottom lines; and reduced poverty in developing countries," says Carmen Nuzzo, senior economist for SRI research. “In aging economies, particularly in the U.S., Europe and North Asia, higher female participation and employment rates can also help to counter a shrinking workforce." Indeed, the Organisation for Economic Cooperation and Development estimates that a 50% reduction in the gender gap in member countries could lead to a GDP gain of around 6% by 2030. That figure could increase by an additional 6% if the gap is completely closed in the next 15 years.

More investors are focused on ESG issues, such as gender diversity, and how they affect corporate and portfolio performance. To meet that demand, Morgan Stanley’s quantitative analysis now provides lists of stocks that screen well or poorly on gender diversity metrics, along with favorable/unfavorable stock selection model rankings. The framework is designed to compare companies vs. their regional sector peers on gender diversity indicators to avoid various regional and sector biases.

“Ultimately, it is our hope that we can more overtly incorporate diversity and other Social and Responsible behaviors into our investment discipline,” Parker says.

For more Morgan Stanley Research on the framework and quantitative model for gender diversity investing, including the selected stocks in the model, ask your Morgan Stanley representative or Financial Advisor for the full reports, "A Framework for Gender Diversity in the Workplace" (Mar 31, 2016) and "Putting Gender Diversity to Work: Better Fundamentals, Less Volatility" (May 2, 2016). Plus, more Ideas.