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Putting a gender lens on the S in ESG

There's a new metric some investors are using to pick investments: gender diversity.

Key takeaways

  • Women are underrepresented in management and on corporate boards despite the fact that about half of all jobs in the US are held by women.
  • Gender lens investing is the practice of investing in companies that show a commitment to putting women in leadership, including the board of directors and all levels of management.
  • There are dozens of options to invest in women. Some funds take a narrow approach, while others employ a much wider socially conscious strategy.
  • Understanding a fund's objective and digging into the methodology can help uncover the right fund for you.

Diversity in leadership and the workforce, including gender diversity, is a key component of the social pillar of ESG investing (investing based on environmental, social, and governance factors). Policies that support employees' quality of life and career development are also considered critical to a socially sustainable business.

Despite some progress toward gender equity in the workplace, most businesses fall short when it comes to the boardroom and management. An analysis of companies in the MSCI All Country World Index (ACWI) found that less than 1 in 5—547 out of 2,877 constituents—had reached a level of sustained board diversity as of 2020 according to MSCI.1 That's defined as having 3 women on their boards for at least 3 years.

In the US, women held just over a quarter of directorships in 2020, despite holding nearly half of all jobs, excluding farms and self-employed.2 Female CEOs are even more rare: 5.7% of CEO positions in the US were filled by women in 2020.

Closing the gender gap is just one reason why gender lens investing is increasingly attracting investors.

What is gender lens investing?

Gender lens investing is identifying companies that have a commitment to helping women across all levels of their organization thrive so that women can achieve leadership roles, pay equity, and benefit from other initiatives that help women lead fulfilling professional lives. Relatively few companies meet the criteria to be included in these funds and that can help bring awareness to the substantial pay gap that exists for women, the deficient state of parental leave in the US, and the underrepresentation of women in leadership roles.

"What I've found is that the leadership and board are important but it's as critical to look at the initiatives, the policies, and philosophies in place around diversity that create that culture of inclusion and innovation," says Nicole Connolly, head of ESG investing at Fidelity and portfolio manager for the Fidelity® Women's Leadership Fund ().

Exploring gender diverse companies and women leaders

If you're interested in turning a gender lens on your investments, it can help to narrow the field by considering your goals and values. Some funds take a rigorous, multi-factor approach to screening companies while others may focus only on a narrow range of factors like gender diversity on the board and in management.

Here are 2 examples of indexes with funds that try to track them. Since this is a small area of the investment universe, the funds listed below are the only ones that track these 2 indexes.

The Impax Global Women's Leadership Index takes the MSCI World Index and screens for gender criteria including women on the board, in the ranks of executives, as well as gender equity in hiring and pay practices, gender goals, and gender data transparency. Other ESG standards must be met for inclusion in the index and it also includes some negative screens, which exclude weapons and tobacco companies.

The fund that tracks this index: Pax Ellevate Global Women's Leadership Fund ()

In the US, the Morningstar® Women's Empowerment IndexSM starts with the Morningstar US Large-Mid Index and then applies criteria from the research firm, Equileap, based on gender balance in leadership and the workforce, equal pay and policies promoting work-life balance, policies promoting gender equality, and transparency in data and policies.

This index also uses some negative screens as well, excluding companies that are involved in weapons, gambling, or tobacco or if they've received legal judgments for gender discrimination or sexual harassment—among others.

The fund that tracks this index: Impact Shares YWCA Women's Empowerment ETF ()

Gender lens investment options

Investors have a variety of options from around the world when it comes to gender and diversity. There were 26 gender lens equity funds as of the third quarter of 2021—10 are global equity funds and 16 of the funds are regional, according to Parallelle Finance, an advocate for and consultant on gender lens investing. There is also a smaller group of funds tracked by Parallelle Finance with a slightly broader mandate, known as diversity, equity, and inclusion funds.3

Each fund family has a different method for isolating gender and diversity criteria. Some seek to track an index precisely, so they use the same ESG screens as the index they track, like the 2 above. Some other investment providers use internal or proprietary screens to actively pick investments for their funds.

To learn how portfolio manager Nicole Connolly approaches the Fidelity Women's Leadership Fund, read Viewpoints on Fidelity.com: Diversity builds strength

For active fund managers like Connolly, speaking directly with companies is often part of the process.

For instance, pay equity is a critical factor for retaining and attracting talented employees. With this in mind, Connolly and the Fidelity ESG team engaged with a large-cap tech company after seeing that the company did not include equity in their pay gap calculation.

Fidelity felt that this was not taking a holistic look at compensation and noted that according to the Rutgers Institute for the Study of Employee Ownership, 24% of male employees held company stock or stock options vs. 17% of female employees and that the average value of company shares held by men was more than 4 times the value held by women. A year later, the team was pleased to see that the company now includes base, bonus, and equity in the total compensation calculation.

"We believe that by measuring and disclosing these metrics, the company will manage a more thoughtful and successful talent recruiting and retention program, which can drive long-term financial performance," says Connolly.

The Fidelity® Women's Leadership Fund ()and the Fidelity® Women's Leadership ETF* () give investors interested in social impact the opportunity to invest with their values.
*This ETF is different from traditional ETFs.Traditional ETFs tell the public what assets they hold each day. This ETF will not. This may create additional risks for your investment. For example, you may have to pay more money to trade the shares of this ETF. This ETF will provide less information to traders, who tend to charge more for trades when they have less information; the price you pay to buy ETF shares on an exchange may not match the value of each ETF’s portfolio. The same is true when you sell shares. This price difference may be greater for this ETF compared to other ETFs because they provide less information to traders; these additional risks may be even greater in bad or uncertain market conditions; each ETF will publish on Fidelity.com and i.Fidelity.com a "Tracking Basket" designed to help trading in shares of the ETF. While the Tracking Basket includes some of the ETF’s holdings, it is not the ETF’s actual portfolio. The differences between this ETF and other ETFs may also have some advantages. By keeping certain information about the ETFs secret, they may face less risk that other traders can predict or copy their investment strategy. This may improve the ETFs’ performance. If other traders are able to copy or predict the ETF’s investment strategy, however, this may hurt the ETF’s performance. For additional information regarding the unique attributes and risks of this ETF, see section below.

What does ESG include?

Environmental:
Sustainability and resource efficiency

Social:
More equitable societies and respect for human rights

Governance:
Accountable government and transparent operations
  • Climate change
  • Greenhouse gas emissions
  • Natural resource depletion
  • Waste & pollution
  • Energy efficiency
  • Alternative energy
  • Labor standards, health, and safety
  • Diversity, employee engagement
  • Supply chain management
  • Local community impact
  • Data protection/privacy
  • Executive incentive structure
  • Board diversity and independence
  • Transparency and disclosure
  • Lobbying/political contributions
  • Bribery and corruption
  • Business ethics

Compiled from the United Nations Principles for Responsible Investment (UNPRI), CFA Institute, and the Sustainability Accounting Standards Board (SASB).

Investing with a gender lens and ESG

When evaluating mutual funds or ETFs with a relatively narrow ESG focus, it's important to review the criteria used to screen businesses. Companies that promote women's leadership may not prioritize other ESG aims. That's why understanding the strategy a fund uses can be critical to choosing the right investment for you.

Fortunately you don't have to start from scratch with this research—ESG reports and ratings can help you understand how well an individual investment aligns with accepted ESG standards and characteristics. To know if a fund lines up with your values, review the prospectus to see how it invests and why it invests that way.

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More to explore

ESG-focused ETFs

Search for ETFs with strategies that may meet your sustainable investing goals, such as strong employee relations, efficient use of natural resources, or gender diversity.

ESG-focused stocks

Search for stocks based on MCSI ESG criteria, such as accounting and governance risk score, environmental score, social score, governance score, or overall ESG rating.
Additional Active ETF Disclosure: The objective of the actively managed ETF Tracking Basket is to construct a portfolio of stocks and representative index ETFs that tracks the daily performance of an actively managed ETF without exposing current holdings, trading activities, or internal equity research. The Tracking Basket is designed to conceal any nonpublic information about the underlying portfolio and only uses the Fund’s latest publicly disclosed holdings, representative ETFs, and the publicly known daily performance in its construction. You can gain access to the Tracking Basket and the Tracking Basket Weight overlap on Fidelity.com or i.Fidelity.com. Although the Tracking Basket is intended to provide investors with enough information to allow for an effective arbitrage mechanism that will keep the market price of the Fund at or close to the underlying NAV per share of the Fund, there is a risk (which may increase during periods of market disruption or volatility) that market prices will vary significantly from the underlying NAV of the Fund; ETFs trading on the basis of a published Tracking Basket may trade at a wider bid/ask spread than ETFs that publish their portfolios on a daily basis, especially during periods of market disruption or volatility, and, therefore, may cost investors more to trade, and although the Fund seeks to benefit from keeping its portfolio information secret, market participants may attempt to use the Tracking Basket to identify a Fund’s trading strategy, which, if successful, could result in such market participants engaging in certain predatory trading practices that may have the potential to harm the Fund and its shareholders. Because shares are traded in the secondary market, a broker may charge a commission to execute a transaction in shares, and an investor may incur the cost of the spread between the price at which a dealer will buy shares and the price at which a dealer will sell shares. 1. https://www.msci.com/www/blog-posts/women-on-boards-the-hidden/02361079223?utm_source=onemsci&utm_medium=email&utm_campaign=msci-weekly-2021-03-11 2. https://www.bls.gov/news.release/pdf/empsit.pdf?mod=article_inline&mod=article_inline 3. "Gender lens investing Q3 2021 review" Parallelle Finance, November 2021.

Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus, an offering circular, or, if available, a summary prospectus containing this information. Read it carefully.

As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security. Fidelity is not recommending or endorsing this investment by making it available to its customers.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses.

All indexes are unmanaged, and performance of the indexes includes reinvestment of dividends and interest income, unless otherwise noted. Indexes are not illustrative of any particular investment, and it is not possible to invest directly in an index.

 MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets.

Impax Global Women's Leadership Index is a customized market-weighted index consisting of equity securities of issuers organized or operating in countries around the world that demonstrate a commitment to advancing and empowering women through gender diversity on their boards, in management and through other policies and programs, and an understanding of the potential business advantages associated with greater gender diversity, as rated by Pax World Gender Analytics. In addition, the companies comprising the Women's Index meet certain environmental, social and governance (ESG) or sustainability thresholds, as rated by MSCI ESG Research.

Morningstar® Women's Empowerment Index pursues objectives that align with environmental, social and governance (ESG) related standards in reference to gender diversity. Built with the data and scoring methodology of Equileap, the index is designed to provide exposure to U.S. companies that have strong gender diversity policies embedded in their corporate culture and that ensure equal opportunities to employees, irrespective of their gender.

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