Aliénor Legendre, Research Analyst at MainStreet Partners
Comprehensive gender equality criteria is increasingly being applied to ESG analysis, though a relatively small number of funds specifically target gender equality KPIs. The criteria includes gender diversity at board Board and executive Executive levels, gender pay gap across the organization, family-friendly policies and work-life balance initiatives, measures to address sexual harassment and discrimination in the workplace, and ways to support women’s advancement and career development.
This reflects a growing recognition of the importance of promoting gender diversity in business and the broader social and economic benefits of doing so. The move was initiated by the UK Financial Conduct Authority’s requirement (since April 2022) that listed companies disclose their board’s performance in diversifying the board composition, including reaching 40% female representation.
According to Ernst & Young (EY)Y, this January marks the turning point in which European financial service companies have attained this 40% gender participation target. Alongside attitudinal shifts, research indicates that boards Boards that include 30% or more women can enjoy a 6% boost to their net margins, according to EY Ernst & Young (EY) and the Peterson Institute for International Economics .
Gender Equity – ESG Sector Leaders & Laggards
From these gains, it is encouraging to see that ESG analysis is evolving to include a more comprehensive consideration of gender equality criteria (Sustainable Development Goal 5). The SFDR for Articles 9 and 8 currently only requires asset managers to publish the percentage of gender diversity on the board and the unadjusted gender pay gap at the fund level in the Principal Adverse Impact disclosure. This is already a good step forward given that for the gender pay gap, for example, no country outside the UK is required to publish this and therefore little data exists.
However, when it comes to fundamental ESG analysis of issuers, other criteria are all too often overlooked when they provide a more complete picture of an issuer’s ESG performance. MainStreet Partners has developed an SDG model that evaluates gender equality, using different inputs as key performance indicators such as the percentage of female managers, board members and employees, as well as relevant policies on anti-discrimination and work-life balance published by the company.
High scores are achieved if a company’s performance is better than peers, and the model also penalizes companies with negative news impacting gender equality. We are able to see that some sectors on average are performing better than others, such as the Consumer Services and Retail Trades sectors, while the Technological and Industrial services sectors still have significant room for improvement in this area.
By integrating these criteria into ESG analysis, investors can gain a more nuanced and holistic understanding of companies’ social and environmental impact and make more informed investment decisions that align with their values and objectives. This, in turn, can incentivize companies to improve their gender diversity practices.
Engaged Shareholders Promoting Gender
When incentivisation doesn’t work, shareholders with ESG investment KPIs can use other tools at their disposal.
In 2019, Swedish pension fund AP7 took legal action – one of its four measures of engagement for sustainable and responsible asset management – against Alphabet based on reports of sexual misconduct at the tech giant and the board’s Board’s perceived mishandling of allegations.
Alphabet reached a settlement with AP7. Alphabet agreed to eliminate mandatory arbitration and limit Google’s use of non-disclosure agreements while prohibiting Google from “providing severance to any employee, including a senior executive, terminated for sexual harassment, sexual misconduct, or retaliation”. Alphabet also committed USD$310 million to fund and create a diversity, equity and inclusion advisory council comprised of outside experts.
Of course, gender equality is closely linked to other social and environmental issues that can affect the sustainability and financial performance of companies. Indeed, it is also vitally important that gender equality funds do not neglect other ESG pillars, which provide a complete and accurate view of the issues involved.
