Amid all the negative rhetoric surrounding environmental, social and governance investing lies the truth that many retail investment clients want to align their investments with their values. They're tired of the business-as-usual paradigm from both a climate and environmental perspective and a social perspective.
While the climate and environmental aspects should be obvious to most folks, the social perspective can be less straightforward. Some investors may focus on the positive, such as corporate community involvement or charity work, while others may want to avoid sin stocks like gambling, alcohol and tobacco.
But what many investors miss is possibly one of the biggest opportunities in responsible investing: gender lens investing. Simply put, gender lens investing adds a layer of due diligence to the research process including a company's overall gender diversity, its leadership and board makeup, and gender-friendly employee policies.
The Economic Argument
There is a strong foundation underpinning the adoption of gender lens investing. A May 2020 McKinsey report details the financial advantages of having a diverse workforce. It says, "Our latest report shows not only that the business case remains robust but also that the relationship between diversity on executive teams and the likelihood of financial outperformance has strengthened over time."
The report goes on to say that companies with the most diversity are more likely to be more profitable than their less diverse peers.
The McKinsey analysis found that "companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than companies in the fourth quartile."
In 2020, Glenmede published a white paper that included a study of Russell 1000 companies and found that firms with greater gender diversity experienced excess returns of 1.1% with 2.2% less risk. A 2019 Credit Suisse report further solidifies the point, saying, "Companies with more diverse management teams have generated sector-adjusted outperformance approaching 4% a year compared to those displaying below the average."
But gender lens investing goes beyond the accountable bottom line. The Glenmede white paper describes additional benefits: "Gender equity means bridging the historical gaps in gender equality through policies such as maternal care, resources like management training and programs that foster a culture generally more supportive of women."
Ultimately, the advantages of incorporating gender lens investing into your asset allocation should outweigh any concerns you may have. Rewarding companies for doing the right thing could also reward your clients with potential above-average returns.
