Putting a gender lens on the S in ESG

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

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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 (FWOMX).

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 (PXWEX)

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 (WOMN)

Gender lens investment options

The Fidelity® Women's Leadership Fund (FWOMX)and the Fidelity® Women's Leadership ETF* (FDWM) 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.

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.

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.

Next steps to consider



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