Gender Equality & ESG Investing: Driving Impact & Returns

As the universe of environmental, social and governance (ESG) funds expands, the criteria and definitions for each ESG component are expanding as well. When it comes to the “G” in ESG, that is a frontier where companies can make tangible progress in short order, particularly when it comes to issues such as diversity and gender equality.

There is plenty of work to be done when it comes to gender equality and investors should favor that work being done because various data points and studies confirm that companies with women occupying c-level executive positions and/or several board spots outperform their less gender-diverse counterparts.

“Today, women represent 5.4% of chief investment officers, 25% of executive/senior-level officials and managers, and one-fifth of board members,” said DeAnne Steele, head of National Portfolio Management and Consultancy Practice with U.S. Trust, in an interview with WisdomTree. “Women in 1960 earned an average of 60 cents to every dollar men earned; in 2016, they made approximately 80 cents.”

Why Gender Diversity Matters to Investors

Easily one of the most pondered questions about ESG investing is whether investing with a moral compass can generate returns on par with traditional strategies or does this type of investing leave investors vulnerable to potentially lagging returns. While that debate is likely to continue raging, there is no arguing the benefits of investing in companies that prioritize gender diversity, particularly when it comes to metrics such as earnings per share (EPS) and return on equity (ROE).

“Notably, over a five-year period (2011–2016), U.S. companies that began the period with at least three women on the board experienced median gains in return on equity (ROE) of 10 percentage points and earnings per share (EPS) of 37%,” according to WisdomTree. “In contrast, companies that had no female director as of 2011 experienced median changes of -1 percentage point in ROE and -8% in EPS over the study period.”

As a result of their potential to deliver out-performance, gender exchange-traded funds (ETFs) could see more flows in the future, according to some industry observers.

In 2018, additional gender equality-focused exchange-traded funds were launched, including one from Lyxor, leading industry expert TrackInsight to say that it was likely that the trend of additional investment flowing toward ESG and SRI-type funds would likely continue into the near future.

An Established Idea

In the U.S., the SPDR SSGA Gender Diversity Index ETF (SHE) is one of the most venerable names when it comes to gender diversity ETFs. SHE debuted in March 2016. Now home to $180.36 million in assets under management, SHE is one of the most successful ETFs to have debuted in the last five years.

SHE “seeks to provide exposure to US companies that demonstrate greater gender diversity within senior leadership than other firms in their sector,” according to State Street.

SHE allocates about 29% of its weight to technology stocks and a combined 20.1% to the healthcare and consumer staples sectors. By SHE's standards, energy, materials, and utilities are among the sectors that have their gender diversity work cut out for them.

Simply looking at the gender breakdowns of corporate boards is not indicative of what stocks are found in SHE. For example, Alphabet Inc. (GOOG) and Exxon Mobil Corp. (XOM) each have three female board members, but neither stock resides in SHE. 

Since coming to market, SHE trails the Russell 1000 Index, but the gender diversity has been 130 basis points less volatile than the Russell 1000.