Investing with a gender lens can potentially increase a company’s—and your portfolio’s—bottom line. Our expert explains.
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 U.S. 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
At the same time, I am heartened to see real interest and momentum among our clients in integrating a gender lens into their investment decisions. According to a recent survey from Morgan Stanley Wealth Management, large percentages of high-net-worth investors said it is important that companies they invest in have policies in place to promote diversity, equity and inclusion (67%); hire and promote employees of diverse backgrounds (66%); and have people of diverse backgrounds in leadership positions (63%).4
In celebration of Women’s History Month, here are a few notable factors influencing the gender lens investing landscape and a few resources to help with your portfolio decisions.
Regulations and Investors Are Changing Corporate Behaviors
In September 2020, California Governor Gavin Newsom enacted regulation AB 979, 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 2022.5
Around the same time, Nasdaq filed a proposal with the U.S. 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 U.S. exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors.6
In the U.S., investors can play a role in influencing companies on the topic of gender diversity, equity and inclusion through voting proxies and dialoguing with companies to encourage disclosure. Specifically, investors have been focused on disclosure of relevant policies and employee diversity statistics. Out of the 529 resolutions filed in 2022 (up significantly from the 435 filed in 2021), 5% of total shareholder resolutions filed 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.7
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 your 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 our quantitative 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 have outperformed their less diverse peers by 1.2% per year between 2011 and 2022.8
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.9,10 Interestingly, there seems to be a statistically significant relationship between diversity practices and employee engagement for all employees, not just women.11 Happy workers create more innovative products. Plus, it’s most cost efficient to keep talented employees than find replacements, so keeping your 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 are 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. Women, according to the World Bank, represent the majority of unbanked adults globally. Increasing access to financial services for women, such as bank accounts, can support inclusion and serves as a growing business opportunity as well.
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 U.S.12 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. To help create change and identify asset managers that may not be majority diverse-owned but are showing progress in advancing diversity, Morgan Stanley launched DEI Signal, a quantitative scoring tool to help investors and their advisors further navigate available options.
When helping our clients to create impact investing portfolios that meet their unique financial and impact goals, a creative and holistic approach to gender diversity, equity and inclusion can be helpful both to build a more diversified portfolio—by accessing the broadest range of asset classes, styles and geographies—and to systemically seek to solve a deep-rooted and complicated issue.
Just as it is important to create impact investing portfolios to help clients meet their needs, it’s equally important for you to understand how your money is working to meet your goals and generating better outcomes for society and the environment. As such, we created Morgan Stanley Impact Quotient®, a patented13 application that enables our clients to evaluate their portfolio on over 100 social and environmental impact preferences, including areas such as diversity in leadership, gender equity and access to finance, education and health care.
Advancing Gender Diversity, Equity and Inclusion
Despite progress made, there is still work to be done on gender diversity, equity and inclusion. Thanks to investor demand, increased data and transparency driving investment strategies and more robust impact reporting capabilities, investors now have more opportunities than ever to create more equitable outcomes for all. If you are interested in applying a gender lens to your investment portfolio, reach out to your Morgan Stanley Financial Advisor to learn more.
