CSR: The alpha female effect

While the gender gap in education may be closing in the US, it has yet to translate into pay equity or senior positions for women in the workplace. According to a UBS white paper on gender lens investing, in 2015 among 25- to 34-year-olds, there were 20% more women than men with at least a bachelor’s degree in the US. 

Furthermore, women now account for almost half of all students in JD (juris doctor), MBA, and MD (medical doctor) programmes – up from 10% in the 1960s. Yet only 4% of S&P500 companies have female CEOs, less than 20% of those companies’ board seats are filled by women, and women occupy just 25% of senior management roles. 

Progress on pay equity in the US has also been painfully slow. According to recent research by the American Association of University Women, in 2015 women earned 20% less than their male counterparts and, at the current rate, the organization estimates it might not be until 2152 that the US finally sees gender pay equity. 

Many women had hoped that a presidential election win by Hillary Clinton, who was championing equal pay, might have speeded up progress. Instead, her opponent Donald Trump, who publicly dismissed the gender pay gap during the election campaign, will become president in January. There is still hope, however, that the needle can be moved on gender discrimination in the workplace even without the president-elect’s support. That hope lies with private investors and the growth in gender lens investing.  

Gender lens investing incorporates several strategies. Primarily, funds and trackers invest in firms that have one or more of the following: a minimum female board and/or senior executive representation, pay equity, and maternity leave and child-care benefits. Some strategies include investing in female entrepreneurs or providing loans to women. 

Assets under management in gender lens products are currently around $560 million. That is a tiny amount of overall investable assets, but it has grown five-fold since 2014. The number of funds has also doubled to 16, says Patricia Farrar-Rivas, founding principal and CEO of Veris Wealth Partners, which has been designing gender lens portfolios for clients for two years. 

Patricia Farrar-Rivas, Veris Wealth Partners

She, and an increasing number of investment managers, believe that gender lens investing is only going to grow. 

Sources say UBS and Goldman Sachs will each be launching a gender lens fund or gender overlay investment opportunities in the coming months. Those will join products like State Street Global Advisors’ (SSgA) SHE ETF that was launched in March this year. It seeks out companies that employ women in high-level leadership roles. Barclays launched a similar product in 2014. 

There are several reasons why gender in investment decisions is gaining ground. The first is that a growing body of research shows that diversity improves company performance. According to UBS’s white paper that was released earlier this year, companies where more than 20% of the board is women demonstrated higher pre-tax margins, higher returns on assets and equity over a five-year period than their peers. Similar research from non-profit Catalyst in 2014 showed Fortune 500 companies with three or more female corporate directors (in at least four out of five years) outperformed those with no women directors.

Stephen Freedman, who headed up UBS’s white paper, says outperformance is now undeniable.

“Research shows that companies that have boards of greater gender diversity had a 1% annual outperformance between 2010 and 2015 – and that was stronger when looking at global stock markets,” he says.

Fund managers point to their own gender lens funds as further evidence. 

Jackie VanderBrug, an investment strategist at US Trust and coauthor of the new book ‘Gender lens investing’, highlights her own firm’s experience. US Trust set up the Women and Girls Equality Strategy in 2013 for high net-worth individuals. It scores its investment holdings across several metrics.

“We consider pay equity, the number of women on a board, hiring, progression for women with the firm, benefits like family leave and also where companies choose to do business, with who and how they are promoting themselves,” says VanderBrug. Over the last three years it has outperformed its benchmark, the S&P1500. 

Why does hiring a more equal number of women pay off? So far, says Freedman, there is not enough evidence to suggest causality, but there is plenty to support the idea that diversity itself is associated with better performance. 

“What has been recognised is the outdated notion that the best person for every job is the one with the highest skills,” says Freedman. “Research instead has shown that senior leadership should be viewed holistically – as a team of skills – and therefore hires should be balanced and complimentary. There is less value in a board where seven people are a carbon copy of the chairperson.” 

Diverse backgrounds and perspectives creating a ‘collective intelligence’ tend to result in better decision making. Furthermore, women can fill skills gaps on boards. Compared with male directors, female directors tend to have more university degrees and are more likely to hold advanced degrees. They are also more likely to have strength in marketing, governance, risk management, or human resources and come from international and non-business backgrounds, says UBS. Fraudulent behaviour also appears to diminish with a higher number of women in senior management. 

Away from data, there is also a reasonable assumption that companies that tackle issues like diversity and pay equity are more likely to avoid reputational hazards that could damage the stock price. They are also more likely to be considering gender and diversity in client-facing areas of business – perhaps improving their sales. 

“Even if causality cannot be established, gender diversity – and diversity in general – clearly cannot be ignored,” says Freedman. 

For wealth managers there is good reason to trumpet gender lens investing. Diversity and environmental, social and governance (ESG) investing are important to the industry’s emerging demographic of clients. According to data from the Center on Wealth and Philanthropy at Boston College, an estimated $59 trillion intergenerational transfer of wealth from baby boomers began in 2007 and will continue until 2061. 

Much of that wealth will be end up in the hands of wives who boast greater longevity than their husbands and to younger generations, including daughters. Indeed women are expected to control two-thirds of US private wealth by 2030. 

Farrar-Rivas describes it as a “perfect wave” for gender lens investing.

“Once that wealth transfer is made, we’re looking at 66% of the financial decisions moving to women,” she says. 

Jackie VanderBrug

VanderBrug points out that women are 40% more likely than men to say the social and environmental impact of their investments is important to them.

“They tend to be holistic and goals-based around their investments, rather than only demanding performance over a benchmark.” 

It is a characteristic shared by millennials. The transfer also means more wealth in the hands of that generation, in which 93% say social investments are important to them. 

Among advisers, traditionally resistant to impact investments, gender lens products are also being embraced. According to Cerulli Associates, only 14% of the broker and financial adviser population in the US are women.

For the large number of male advisers now representing female clients, therefore, says Farrar-Rivas, gender lens products provide a comfortable entry point for conversation. She highlights that 70% of women change adviser when their husbands die: “Male advisers are therefore going to have to learn quickly how to understand and represent what women want.” 

The rapid change in the client gender mix is bringing diversity to the investment management industry itself. Far more female advisers are needed because, as research from SSgA shows, 55% of women between ages 25 and 34 prefer working with female advisers. US Trust, for example, has aimed to add more women-led investment managers to its platforms, says VanderBrug. New female-targeted advisory firms are also appearing, such as Ellevest, run by the former head of wealth at Bank of America Merrill Lynch, Sallie Krawcheck. 

Also, as women take on a larger percentage of the consumer purchase decisions, companies themselves are being forced to hire more women employees into senior positions to better understand their own customers.   

While there is clearly an organic shift by investors to include gender within their portfolio decisions, some are also using their voice as investors to increase the speed of change. 

Arjuna Capital, for example, employs a gender lens strategy in the Highwater Global Fund that includes actively approaching firms that do not disclose their gender pay gap. It has outperformed for 11 years running. 

Natasha Lamb, who runs shareholder engagement and research at the firm, has battled for greater transparency in Silicon Valley – an industry that has now turned the corner on discrimination. 

Two years ago she filed a proposal on gender pay equity with eBay.

“At that time, only 25% of the work force in Silicon Valley was made up of women,” says Lamb. “Up the ranks, only 11% of firms had a female executive and only 10% of board seats were held by women. So we asked that eBay report its gender pay gap and commit to closing it.” 

EBay declined, but Lamb’s timing could not have been better. Two weeks before the proposal went to a vote at eBay’s annual meeting, SalesForce chief executive Marc Benioff announced his firm would close the gender gap. Before that, only the apparel firm, The Gap, had addressed the issue. From then on momentum took hold, says Lamb. The proposal at eBay made it to a vote that year, and while only 8% of eBay’s shareholders at that point supported a gender pay gap disclosure, by the next year it was 51%. 

Over 2015 Lamb approached Apple, Microsoft, Facebook, Google, Adobe, Expedia, Amazon and Intel. Ultimately some of those proposals were withdrawn because the firms voluntarily came out and reported their pay gap, including Apple and Intel. Some battles were a harder fight, like Amazon, Google and Facebook. 

Natasha Lamb, Arjuna Capital

Now Lamb is taking on the issue at large consumer companies, such as Starbucks, and the financial industry. Arjuna has filed proposals with Bank of America, Wells Fargo and Bank of New York Mellon, for example.

“Innovation is shown to improve when women are included in leadership decisions,” says Lamb. “It’s vital for the competitiveness of any company to ensure they are not only hiring equitably, but supporting women within the business so as not to lose them.”

Lamb says more investors, driven by both the business case for diversity and the social issue, are joining Arjuna Capital in using shareholder filings as a means to push for gender pay equity and greater transparency. Three other investment groups have co-filed with the firm, she says, and over 20 filings are expected to be made this year on gender equity pay disclosure in the US, compared with just 10 in 2014.

 VanderBrug says transparency and collecting data will be key in moving gender equality forward and in building more interest in gender lens investing: “As companies report additional specific gender disaggregated data, it will support existing and new strategies. Data at a country and regional level will also inform thematic opportunities in areas including infrastructure, health care and financial services.” 

There is also opportunity in venture capital to apply a gender lens. Freedman points out that in the US only 4% of venture capital goes to women.

“That’s a funding gap,” he suggests, “and where capital is scarce, outsized returns can be generated. Including a gender lens would be an interesting way to complement a venture-capital strategy.”

In light of an incoming US administration that has yet to confirm that it supports pay equity, Lamb says gender investing and the transparency it creates is more important than ever. She says she is hopeful that corporations and leaders will not be swayed by the tone of the new administration – especially in light of the obvious business case for diversity. 

Farrar-Rivas points out the wider benefits: “When women benefit from pay equity and child care, then families benefit. A lot of men realize that. This isn’t just an appealing proposition for women.” 

Indeed it is not. According to a McKinsey Global Institute study, improving gender equality would add at least $2.1 trillion to US GDP by 2025 – an increase roughly the size of the Texas economy.

“The business and economic case is out of the bag. You can’t put it back in,” says Lamb.