Why gender diversity may lead to better returns for investors
Morgan Stanley Wealth Management03/04/22
Summary: Investing in equality for women can potentially increase a company’s—and your portfolio’s—bottom line.
Despite significant strides made by women in the workforce, recent research shows that the pandemic has slowed progress. While COVID-19 has impacted all of us, it has disproportionately affected women, especially women of color. The challenges are numerous: Women are more likely to work in roles eliminated in the pandemic and, women engaging in paid labor or not, often take on a greater share of household labor, including childcare.1
Using data from the Bureau of Labor Statistics monthly jobs report, The National Women’s Law Center found that over one million fewer women were in the labor force in January 2022 as compared to the beginning of the pandemic (February 2020) while men have largely recouped their labor force losses.2 An article from The New York Times reports that 66% of mothers with partners say that they are chiefly responsible for childcare, compared to 24% of fathers.3 Further, the gender pay gap in the US remains at 19%,4 just 26% of corporate board seats in Russell 3000 companies are held by women,5 and only 14% of fund managers are female.6
Every March, Women’s History month serves as a great reminder to reflect on a year-long conversation—investing to support advancing women and families. Lily Trager, Morgan Stanley Wealth Management’s Head of Investing with Impact, sees real interest and momentum across clients in integrating gender equality into their investment decisions. In celebration of Women’s History Month, here are a few notable factors influencing the gender 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 requires 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 2022.7
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 will require all companies listed on Nasdaq’s US exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors.8
In the US, investors can play a role in influencing companies on the topic of gender equality through voting proxies and discussing disclosure opportunities with companies. Specifically, investors have been focused on disclosure of relevant policies and employee diversity statistics. According to shareholder engagement data from the shareholder advocacy nonprofit As You Sow, out of the 435 resolutions filed in 2021, 9% address board diversity and 16% address workplace diversity; combined, these exceed the largest single category, corporate political activity (with 18% of total filings).
Gender-diverse companies have outperformed, on average
Gender equality emphasizes 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 from 2019, a more diverse workforce, as represented by women across all levels of the organization, is correlated with higher average returns. When Morgan Stanley's 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 3.1% per year. From 2011–2019, companies with more gender diversity enjoyed a one-year return on equity that was 2% better than companies with low gender diversity.9 These more diverse companies experienced lower volatility, too.
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.10,11 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 gender diversity 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 equality that motivated investors can also support. For example, investing in companies providing products and services that benefit women and girls.
A creative and holistic approach to gender equality that includes representation and more can be helpful both to build a more diversified portfolio—by accessing the broadest range of asset classes, styles, and geographies—as well as systemically seeking to solve a deep-rooted and complicated issue.
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.
- "Some gender disparities widened in the U.S. workforce during the pandemic," Pew Research Center, Jan 14, 2022: https://www.pewresearch.org/fact-tank/2022/01/14/some-gender-disparities-widened-in-the-u-s-workforce-during-the-pandemic/
- “Men Have Now Recouped Their Pandemic Related Labor Force Losses While Women Lag Behind,” The National Women’s Law Center, February 2022: https://nwlc.org/wp-content/uploads/2022/02/January-Jobs-Day-updated.pdf
- “The Primal Scream,” The New York Times, Feb. 4, 2021, https://www.nytimes.com/interactive/2021/02/04/parenting/working-moms-coronavirus.html
- "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
- 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/organization/our%20insights/delivering%20through%20diversity/delivering-through-diversity_full-report.ashx