Why gender lens investing may lead to better returns
Morgan Stanley Wealth Management03/01/23
Summary: Discover how gender lens investing can help enhance your portfolio’s bottom line while also promoting greater workplace diversity and equity.
Every March, Women’s History month serves as a great reminder to reflect on a year-round conversation: investing to support advancing women and families.
Despite significant advances made toward greater gender diversity, equity, and inclusion in our economy, there remains opportunity for further progress:
- The gender pay gap in the US remains at 19%1
- Just 26% of corporate board seats in Russell 3000 companies are held by women2
- Only 14% of fund managers are female3
Here are a few notable factors influencing the gender lens investing landscape and resources to help with portfolio decisions.
Regulations and investors are changing corporate behaviors
In September 2020, California Governor Gavin Newsom enacted regulation requiring minimum representation by minority individuals on corporate boards. The law required a minimum of one minority director by the end of 2021, and larger boards to have a minimum of 2–3 by the end of 2022.4
Around the same time, Nasdaq filed a proposal with the US Securities and Exchange Commission (SEC) to adopt new listing rules related to board diversity and disclosure. This proposal was passed in August 2021 and requires all companies listed on Nasdaq’s US exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors.5
In the US, investors can play a role in influencing companies on the topic of gender diversity, equity, and inclusion through voting proxies and discussing disclosure opportunities with companies. Specifically, investors have been focused on disclosure of relevant policies and employee diversity statistics. Out of the 529 shareholder resolutions filed in 2022, 5% address board diversity and 9% address workplace diversity, continuing to signal that this is an important issue for investors. There were also several resolutions filed seeking racial and gender median pay data to assess enduring pay inequities.6
Gender-diverse companies have outperformed, on average
Studies show that a balance in representation across all genders can help to broaden perspectives and drive better decision-making across organizations of all sizes. As it turns out, diverse perspectives actually have the potential to increase a portfolio’s bottom line.
According to Morgan Stanley Research, a more diverse workforce, as represented by women across all levels of the organization, is correlated with higher average returns. When the Research team analyzed global companies based on their percentage of female employees and other metrics of gender diversity, companies that have taken a holistic approach toward equal representation outperformed their less diverse peers by 1.2% per year between 2011 and 2022.7
Why has gender diversity translated to outperformance?
A few possible reasons:
- Employee satisfaction: Diversity broadly, including gender diversity has been shown to correlate with superior performance in terms of employee engagement.8,9 Interestingly, there seems to be a statistically significant relationship between diversity practices and employee engagement for all employees, not just women.10 Happy workers create more innovative products. Plus, it’s most cost efficient to keep talented employees than find replacements, so keeping a workforce motivated and engaged can help a company’s bottom line.
- Recruit diverse talent: Family-life balance, flexible working programs, and family leave may be 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.
- Promote innovation: A more diverse perspective can improve team decision making. If everyone sitting around a board room has similar experiences and perspectives, that could create unintentional blind spots in decision making. Further, innovative products and services that arise from diverse perspectives can allow companies to tap new markets and add new revenue sources.
- Avoid reputational risk: Companies may suffer when they experience controversies over issues such as big pay gaps, wage disputes, sexual harassment litigation, and equal opportunity litigation. While these issues can happen even at diverse workplaces, many investors seek to avoid these reputational risks.
Incorporating a gender lens into investment portfolios
Just as getting qualified women into the C-suite and the boardroom, female ownership, and developing policies supporting diversity is important, there are other dimensions of gender diversity, equity, and inclusion that motivated investors can also support. For example, investing in companies providing products and services that benefit women and girls.
In addition, investors may consider diversity at the asset managers they invest with. Women continue to be underrepresented in the fund management profession; in fact, diverse-owned firms manage less than 1.5% of assets in the US.11 Whether investing in diverse-owned firms or looking at diversity across the leadership and firm more broadly, investors can consider these factors as part of a holistic approach to gender lens investing.
Despite progress made, we are still a long way away from achieving gender equality. Thanks to investor demand, increased data and transparency driving investment strategies, and more robust reporting capabilities, investors now have more opportunities than ever to create more equitable outcomes for all.
- "The State of the Gender Pay Gap in 2021," Payscale, accessed Feb 24, 2022: https://www.payscale.com/research-and-insights/gender-pay-gap/#section14
- "Q3 2021 Equilar Gender Diversity Index," Equilar, Oct 28, 2021: https://www.equilar.com/reports/87-q3-2021-equilar-gender-diversity-index
- "The Percentage of U.S. Female Fund Managers Is Exactly Where It Was in 2000," Morningstar, Mar 16, 2021: https://www.morningstar.com/articles/1029482/the-percentage-of-us-female-fund-managers-is-exactly-where-it-was-in-2000
- "CA Bill AB 979 Seeks to Increase Board Diversity," Sheppard Mullin, Dec 14, 2020: https://www.sheppardmullin.com/
- "Statement on Nasdaq’s Diversity Proposals – A Positive First Step for Investors," U.S. Securities and Exchange Commission, Aug 6, 2021: https://www.sec.gov/news/public-statement/statement-nasdaq-diversity-080621
- 2022 Proxy Preview, As You Sow, Sustainable Investments Institute, and Proxy Impact
- Morgan Stanley Research, HERS Update: Gender Diversity Continues to Drive Alpha, February 1, 2023
- Sources: 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; Note: Past performance is not indicative of future results.
- "The role of diversity practices and inclusion in promoting trust and employee engagement," Deloitte, May 2015: https://www2.deloitte.com/au/en/pages/human-capital/articles/role-diversity-practices-inclusion-trust-employee-engagement.html
- "Delivering through Diversity," McKinsey & Company, Jan 2018: https://www.mckinsey.com/~/media/mckinsey/business%20functions/people%20and%20organizational%20
- “Knight Diversity of Asset Managers Research Series: Industry.” Knight Foundation. December 7, 2021. https://org/reports/knight-diversity-of-assetmanagers-research-series-industry/
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