Can investing in companies with favorable gender diversity records effect change and produce positive financial returns?
Do companies with higher levels of gender diversity tend to perform better relative to their peers? A growing body of evidence suggests the answer may be “yes.”
As more investors tailor their portfolios to drive positive social and environmental change while still realizing a financial return, one issue that is gaining momentum across individual and institutional investing is gender diversity.
Gender diversity can be thought of not as the promotion of one gender over another, but rather an examination of how genders—through a balance in representation and inclusion—can broaden perspectives and drive value in different settings, including corporations that we might invest in.
As an investment opportunity, gender diversity is about identifying the ways in which achieving that balance may drive positive financial outcomes.
From environmental concerns to religious values, individuals, families and institutions are finding that they can serve the dual purpose of investing in organizations that are consistent with their personal beliefs—and in some cases actually drive positive social and environmental change—while still realizing a financial return. This integrated approach to investing we call “Investing with Impact."
Alongside such approaches as faith-based investing or fossil-fuel divestment, gender diversity investing has emerged as another option for investors. Across the board, research shows that increased diversity and a more inclusive workforce are indicators of strong financial performance.
Companies are now providing investors access to gender diversity criteria such as number of female employees, managers and board members; breadth and quality of programs addressing home/life balance; and gender parity/gender diversity. As a result, investors are now able to incorporate this criteria into their financial decisions.
The draw for investors? Companies with strong gender diversity criteria may be better positioned across all performance drivers, while companies with relatively poor gender diversity criteria may be exposed to higher levels of risk as a result of discrimination lawsuits, exploitation issues and poor talent retention.
According to our own Morgan Stanley analysis released in May, 2016, 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.1 Further, a Harvard Business Review study from July, 2016, found no meaningful difference in performance between women- and men-led start-ups when financing is provided by venture capital firms with female partners.2
Investment strategies that utilize gender diversity criteria, while still relatively small, is growing in size and sophistication, exemplified by institutional funds. Data published by US SIF showed investment funds incorporating the consideration of one factor, diversity and equal employment opportunity (EEO), nearly tripled, in number and assets, between 2005 and 2014. As of 2014, these funds represented $578 billion in assets, making diversity/EEO one of the top 10 environmental, social and governance (ESG) issues being considered by institutional investors.3
As with any ESG issue, gender diversity can be incorporated into investment decisions in a variety of ways, each of which should be considered within the context of an investor's overall portfolio and investment plan. For instance, one approach is to use gender diversity as a screen by minimizing exposure to companies with poor gender diversity records including weak policies, poor supply chain safety records or involvement in the adult entertainment industry. Avoiding the worst gender diversity offenders may help to mitigate exposure to certain long-term risks.
Some investors may seek to allocate capital to investment strategies that invest in companies that are “Gender Diversity Leaders” exhibiting strong gender diversity policies, programs, diverse boards, management and work/life balance programs as a way to increase gender diversity opportunities as well as mitigate risk.
Following a more targeted approach—Gender Lens Investing—investors allocate capital to companies or strategies seeking to drive solutions to create greater gender equality through workplace equity, access to capital for women and producing products and services that benefit women and girls.
The integration of gender diversity criteria into an investment portfolio should be considered alongside traditional asset allocation and overall investment strategy decisions. While it is a growing market segment, there are still a limited number of available market-rate products, making it difficult to apply these gender diversity approaches to a full portfolio in the short-term.
Integrating gender diversity into your investing strategies is just one aspect of Morgan Stanley's Investing with Impact Platform. Launched in 2012 as part of the firm wide commitment to sustainable investing, we define Investing with Impact as an investment approach that aims to generate market-rate financial returns while demonstrating positive environmental and/or social impact. Investing with Impact empowers our clients—from individuals to institutions—to align their investments with their values and mission.
In Morgan Stanley's view, there is no single motivation to pursuing Investing with Impact and gender diversity based investing, and certainly more than one approach to implementing. We are proud to partner with our clients to take action towards aligning investments with personal and institutional values.
This article is an edited summary of Morgan Stanley Wealth Management's primer, “Gender Diversity: A Roadmap for Investors," which details the background and implementation of this increasingly popular investment approach. Speak with your Morgan Stanley Financial Advisor (or find one here) to see how this type of investing fits into your portfolio strategy.