Female-Led Indexes: The ESG Funds of the Future?

Some analysts are now suggesting that whatever the reason behind the link (whether better performance drives gender diverse hiring or whether gender diverse hiring drives better performance) reviewing the gender diversity of a company’s leadership may be an important step in deciding whether to invest.

Not too long ago, we wrote about how a handful of state laws requiring more diverse boards might impact financial advisors with institutional clients.[1] There we talked about California and Pennsylvania’s nascient laws, which followed France, Iceland, Norway, Germany and Spain. Since that article, India now also has mandatory gender diversity requirements for corporate boards. The statistics on women serving on boards of publicly traded companies is definitely trending up. Recent reports have noted that: “[i]n 2020, 75% of indices had boards with at least 22% women.  In 2014, nearly the reverse was true with 75% of boards having less than 25% women representation.”[2]  

New research may show that diversity in leadership does more than ensure fair representation. It may also change how companies think. Professor Corrine Post studies how diversity enables (or restricts) organizational performance. Working with international colleagues, she studied the impact of how those gender diversity requirements in France and other countries may have changed performance across several key metrics, including handling expenses, company expansion and communication to shareholders.[3] She examined firm communications and specific risk-taking behaviors. Her conclusions included that gender diverse firms responded better to risk, in that companies engaged in less risk-taking and more transformation. Firms with more gender diversity also shifted expansion propensity from mergers and acquisitions to research and development.

This insight into the mechanics of how gender diversity impacts firm decision making may help explain why recent research indicates that gender diversity in leadership leads to stronger financial performance. For example, in 2020, Australian researched showed that “[i]ncreasing the number of women in other key leadership positions by 10% or more, meanwhile, increases a company's market value by 6.6% or an average $105 million.”[4] That same year, Goldman Sachs released a massive research report gleaned from the STOXX 600, a collection of stocks of a group of European companies, which showed that employing women in more leadership positions – outside of the C-Suite and board positions “coincided with a higher annualized total return, or a stronger financial performance.”[5] Goldman Sachs also noted that this link did not exist in every industry and was absent from the tech sector. The BBC also reported on a study that found “London-listed companies with no women on their executive committees have a net profit of 1.5%, whereas those with more than one in three women at that level reach 15.2% net profit margin.”[6]

In 2019, S&P Global released research results from a study they did on earnings and share price data after executive appointments for companies all based in the U.S. They found that “[i]n the two years following a new CEO appointment, the stock price for companies that appointed female chief executives outperformed those that appointed men by an average of 20% …” This difference was enhanced when women were appointed to CFO positions. Companies with female CFOs “outperformed those with newly-appointed male CFOs by 8% on share price returns…and by 6% on profitability.”[7] This research has been called “statistically-significant” and Forbes summarized the entire field of reports as: “link between gender diversity and better results is undeniable.” Some analysts are now suggesting that whatever the reason behind the link (whether better performance drives gender diverse hiring or whether gender diverse hiring drives better performance) reviewing the gender diversity of a company’s leadership may be an important step in deciding whether to invest.[8]

Given both the depth of understanding about organizational behavior as well as the strength of the performance findings, financial advisors may want to be ready when clients ask about how to monitor their investments by gender diversity – for performance, not only political, reasons. One way to do so is to keep an ear to the ground for the growing number of so called “gender-lens” funds.[9] However, similar to the ESG investing funds where greenwashing may be a concern, there could be a lack of parity between the fund’s stated intention and its actual performance.[10] Advisors may want to familiarize themselves with Morningstar’s 2019 report on the potential pinkwashing in this area and track some gender-lens funds for performance to be ready when clients start asking for information.

[1] https://www.bcgbenefits.com/blog/corporate-board-changes

[2] https://www.catalyst.org/research/women-on-corporate-boards

[3] https://hbr.org/2021/04/research-adding-women-to-the-c-suite-changes-how-companies-think

[4] https://www.abc.net.au/news/2020-06-19/women-in-leadership-boost-success/12370516

[5] https://thehill.com/changing-america/respect/diversity-inclusion/525581-companies-with-more-women-in-management-perform

[6] https://www.bbc.com/news/business-53548704

[7] https://www.cnbc.com/2019/10/18/firms-with-a-female-ceo-have-a-better-stock-price-performance-sp.html

[8] https://www.thebalance.com/do-companies-with-female-executives-perform-better-4586443

[9] https://www.cnbc.com/2021/12/01/gender-lens-investors-direct-their-money-to-women-led-companies.html

[10] https://www.morningstar.com/insights/2019/04/01/gender-intentional

These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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