The Economic Imperative: Investing in Women for Growth and Diversity

By Nick Hurley

The Economic Imperative: Investing in Women for Growth and Diversity

Introduction

In a major paper released this week titled ‘Lifting Global Growth by Investing in Women‘, Blackrock researchers have demonstrated how investing in women’s participation in the labor force can lead to significant economic gains. The study emphasises the importance of diversity in the workforce, not just in terms of sheer numbers, but in terms of the representation of women in key roles. The findings highlight the multifaceted benefits of a diverse workforce, including increased economic output, tapping into underutilised talents, and the infusion of fresh perspectives.

The Power of Diversity

The study underscores that there is an optimal ‘sweet spot’ in terms of women’s representation in the workforce that significantly impacts performance. It’s not about dominance by one gender or the other, but about achieving a balanced and inclusive workforce. Companies with the most diverse workforces outperformed their peers in terms of return on assets (RoA) by an impressive 29% on average, over the 2013-2022 period.

Addressing the Seniority Gap

While board-level diversity has rightfully received significant attention from regulators and stakeholders, the focus on women’s representation within other parts of organisations has been comparatively limited. However, a positive trend in diversity disclosures is emerging globally, driven by investor inquiries, evolving ESG rating methodologies, and increased interest in DEI practices. Notably, the proportion of companies in the MSCI World Index disclosing their women’s representation in the workforce has surged from 32% in 2012 to an impressive 80% in 2021.

The analysis of this data by Blackrock highlights a concerning trend: as seniority increases, women’s representation tends to decline, which can negatively impact performance. Companies with middle management that mirrors the overall workforce in terms of women’s representation generated 36 basis points higher risk-adjusted monthly returns compared to those with poor diversity metrics. Promoting more women into senior roles has the potential to enhance a portfolio’s performance by 72 basis points per year over the MSCI World benchmark.

Breaking the Glass Ceiling

While companies with female CEOs have demonstrated superior performance, the study sheds light on the persistent glass ceiling that women face in reaching top leadership positions. The data shows that companies with female CEOs outperformed those led by men by an average of 1.0 percentage point in terms of RoA. However, women make up only 6% of CEOs as of 2022 in MSCI World Index companies. This phenomenon extends beyond corporations, with women-owned or managed hedge funds and startups outperforming their male-led counterparts. Women-owned or managed hedge funds have outperformed an average hedge fund by 10.5% over the last 16 years.

When examining the global landscape, significant variations emerge in the prevalence of women occupying CEO seats. Among companies within the MSCI World Index, Nordic countries (Finland, Norway, Sweden) and Singapore stand out as leaders in promoting gender diversity at the highest levels of leadership. Conversely, countries like Spain, Italy, and Israel lag behind, with no female CEOs in 2022. The United States occupies an intermediate position, with 7% of companies boasting female CEOs, highlighting both progress and room for improvement.

Fostering a Women-Friendly Culture

Investing in companies that prioritise a women-friendly culture can also lead to enhanced performance. The study suggests that portfolio tilts towards companies with higher average maternity leaves taken could improve performance by over 1 percentage point per year versus the Russell 1000 Index. This underscores the importance of policies that support work-life balance and gender inclusivity.

The Need for Better Disclosure and Standardisation

The research emphasises the importance of improved disclosure and standardisation of metrics to better understand the financial linkages between diversity and performance. As human capital and diversity metrics gain prominence in driving financial performance and investment decisions, it is expected that disclosures in these areas will become more robust and informative.

The report mentions efforts to establish global standards for human capital disclosures are underway through initiatives led by the International Sustainability Standards Board (ISSB) under the International Financial Reporting Standards (IFRS), and the Sustainability Standards Advisory Forum (SSAF), with support from G20 members. Once established, these standards will serve as a guide for corporate disclosure practices, enabling emerging regulations to converge around the most pertinent data points for investors.

Regulatory Shift towards Pay Transparency

The report also touches upon recent regulatory developments primarily targeting gender pay gaps, with the European Parliament’s approval of the “EU pay transparency directive” in March 2023. This directive mandates companies with over 100 employees to calculate and publish their median pay gaps between women and men, beginning in 2027. Similar requirements have been introduced in Australia for companies with 100+ employees, set to take effect in 2024, while the UK has mandated such disclosures for companies with 250+ employees since 2017.

Conclusion

Investing in women and promoting diversity in the workforce is not only a matter of social equity but also a sound economic strategy. However, the persistence of gender disparities in CEO representation underscores the need for continued advocacy, mentorship, and systemic change to dismantle the barriers that inhibit women from ascending to the pinnacle of corporate leadership.

The findings presented in this paper provide compelling evidence of the tangible benefits that accrue from a diverse and inclusive workforce. By recognising the financial implications of gender diversity, investors can play a pivotal role in driving positive change in the corporate landscape, ultimately leading to a more prosperous and equitable global economy.

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