Not only is striving for gender diversity an inherently positive act, it’s also a way to strengthen companies in more ways than one. Even investors can get involved in helping to make the world a more equal place – and it can even benefit your portfolio to do good.

Gender equality is often at the forefront of efforts to improve diversity. As an easily measurable trait, it is the most widely studied diversity metric and is usually the starting point for companies embarking on their diversity journey.

Gender diversity improves performance

The business case for increased gender diversity has been positive. According to the UK’s Financial Reporting Council, diversity in the boardroom could improve the quality of decision-making by reducing the risk of groupthink. Other studies suggest that diverse and inclusive companies tend to make better, bolder decisions.

In its 2020 report ‘Diversity wins: How inclusion matters’, McKinsey found that companies in the top quartile of gender diversity on executive teams were 25% more likely to experience above-average profitability than peer companies in the fourth quartile.

Moreover, the higher the representation, the higher the likelihood of outperformance. Companies with more than 30% of women on their executive teams were significantly more likely to outperform those with between 10% and 30% women. These companies were in turn more likely to outperform those with few or no women executives. As a result, there is a substantial performance differential of 48% between the most and least gender diverse companies.

Research from Morgan Stanley published in February 2023 entitled ‘Gender diversity continues to drive alpha’ similarly found that a more diverse workforce, as reflected by women across all levels of the organisation, was correlated with higher average returns. Their quantitative analysis of global companies based on the percentage of female employees and other gender diversity metrics showed that companies with a holistic approach toward equal representation outperformed their diverse peers by 1.2% per year between 2011 and 2022.

Tackling the uneven scorecard in boardrooms

Some progress has indeed been made. Data from the Organisation of Economic Cooperation and Development (OECD) shows that companies with more than 33% of women board participation doubled from 2017 to 2019. However, there is still room for improvement – particularly in Asia, where average female board representation is estimated at only around 15% on some counts. Globally, it is estimated that currently, women still hold only 23% of board positions.

Many governments also explicitly recommend or mandate quotas and targets to promote women’s participation in the boardroom. For instance, there is a regulatory mandate of at least one female director in India. In France, failure to comply with a 40% female representation quota would result in appointments to the board being voided, among others.

Progress has, however, been uneven. Citigroup’s analysis of around 1,300 companies across twelve Asian countries within their universe of coverage, showed that female representation on boards was 15.03% on average, below the global average. Some 115 companies (less than 10% of the sample) had less than 33% female representation on their boards and 270 companies (slightly over 20%) had no female representation on their boards.

Three ways to invest in gender equality

When taking into account the aforementioned statistics – such as the significant performance differential of 48% between the most and least gender diverse companies – the topic’s importance is not to be underestimated, for the good of society and even for portfolios. There are several ways that investors can shape the discourse on gender diversity.

First, investors can engage with corporates and use their influence to drive change. This could be through interactions with companies or use of voting rights at annual general meetings. For instance, in their updated proxy voting guidelines for Canadian mainboard listed companies, Institutional Shareholder Services (ISS) and Glass Lewis (GL) have recommended voting against the chair of the nominating committee where the board does not comprise at least 30% women directors.

Second, investors can make gender diversity best practices a criterion in their evaluation of investee companies, much the same way one would with traditional due diligence screens. Key issues to consider include:

• Senior leadership (what is the board gender diversity)
• Disclosure (does the company disclose annual data on workforce composition by gender, job level and pay equity, are gender pay gaps disclosed)
• Training (what training does the company provide to address bias and promote inclusion)
• Targets (has the company identified barriers to gender diversity and are there programs to address them, are there clear diversity targets and how often are these communicated to staff)

Finally, investors with a more activist preference can consider gender lens investing. This is defined as investing with the intent to address gender issues or promote gender equity, and typically involves investing in women-owned or women-led enterprises, investing in enterprises that promote workplace equity (e.g. in staffing, management, on boards and along the supply chain), or investing in companies that offer products or services which improve the lives of women and girls.

The positive news is that we expect gender diversity to continue to gain traction in corporate culture. Growing awareness and acceptance of this will also serve as a catalyst for change in organisations and beyond.