UMA Research

Investing in gender diversity in the workplace is good for companies and investors….Calls for more female participation in the economy are at high pitch, often based on political or cultural arguments founded on fairness. But a persuasive argument for diversity and equality can also be anchored to the bottom line. In part 1 of our two-part series we explore compelling data that highlights the positive trickle-down effect of gender diversity.

 The link between company financial performance and gender diversity is the latest in an emerging body of academic and qualitative research that links well-rounded and inclusive work environments with returns.

“Gender diversity can improve team decision-making and improve innovation capabilities for development of new products or services,” said Jessica Alsford, head of Morgan Stanley’s Sustainable and Responsible Investment (SRI) research team which collaborated with the firm’s Global Quantitative Research team to demonstrate that gender diversity does indeed make the bottom line more profitable.

Collecting and analyzing data from around the world, Morgan Stanley created a proprietary gender-diversity framework for ranking more than 1,600 stocks globally. Publishing their findings in a report “Putting Gender Diversity to Work: Better Fundamentals, Less Volatility” they showed that more gender diverse companies offer similar returns with lower volatility.

“Equal representation of the sexes is particularly key for sectors where employee engagement and satisfaction reflects directly on the quality of the product or service—financials, technology, retail, leisure and business services, among others,” said Alsford. “It can also create alignment with diverse customer bases and, thus, open up untapped business opportunities.”

Real-time support to findings

The Morgan Stanley findings are hardly isolated. Last year, a survey of almost 22,000 companies by the Peterson Institute for International Economics (PIIE) showed the presence of more female leaders in top management positions correlates with increased profitability, as reported in a paper entitled Is Gender Diversity Profitable? Evidence from a Global Survey.

American Express, for example, is committed to diversity not just because it’s the right thing to do or “nice to have,” said Valerie Grillo, chief diversity officer at American Express, “but frankly, because our business leaders believe that a focus on diversity is actually going to help us with the bottom line.”

According to Grillo and her colleagues, diversity, when it’s embedded in corporate culture, will succeed because of its ability to drive relationships not only with employees but also with customers and merchants, and, ultimately, this will drive revenue.

A fine point on management quality

Movers and shakers on Wall Street have also taken action. In 2014, Sallie Krawcheck, the former Bank of American and Citigroup executive, stepped up her efforts to promote women in business and leadership by teaming up with Pax World Management to launch the first index fund that invests in the advancement of women.

The fund focuses on top companies that have a significant proportion of women in senior leadership positions and makes the bet that gender diversity at the top can drive superior corporate performance and ultimately, significant returns for investors.

Krawcheck’s fund, a mutual fund that gives investment priority to stocks of corporations with favorable metrics regarding women in leadership positions, was the first of its kind. In 2015, another company, Glenmede Investment Management, followed suit and established The Glenmede Women in Leadership Fund, a large-cap core fund.

For as long as anyone has been investing, investors have always looked at management quality as a driver of corporate performance and in turn investor returns, said Krawcheck. “This puts a finer point on a key driver of management quality.” And, she added, it will drive investors to these companies.

Women and younger investors are asking for these types of investments and increasingly look to invest with a goal of getting fair returns and doing it in a way that expresses and supports their values. Many of these investors say they want to invest in companies with greater gender diversity, in part because of the positive trickle-down effect to the rest of the company, through lowered gender pay disparities.

This isn’t an “isn’t that nice” fund, she said. “It really represents capitalism at work and addresses a business opportunity.”

In part 2 of this series, we will discuss the direct impact of gender diversity, especially on the management level, and the obstructing factors we need to address.

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