How to Index Gender Diversity

Companies that create inclusive cultures are tapping into the labour force’s full talent pool while benefitting from cognitive diversity. 

Dan Lefkovitz 7 March, 2022 | 8:32AM
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Designed Image Women in Investing

It will be years before we can fully assess the damage that Covid-19 has done to the cause of gender equality. What’s clear now, is that it’s a major setback. The pandemic-driven economic downturn of early 2020 was labelled a ‘shecession’ for how it disproportionately impacted industries like hospitality and retail, in which women are overrepresented. The U.N. has warned of ‘four lost decades’ in progress toward gender-related goals, estimating that global female employment declined by 54 million in 2020 as the burden of family care fell largely on women’s shoulders. In the assessment of the Canadian Women’s Foundation, “It’s ‘normal’ that the people getting harmed the most are the people already facing the worst inequities, including women.”

No wonder then that for some investors, gender diversity has become a more urgent consideration. This is partly a matter of social justice. But there are also financial factors at play. Research from McKinsey, Credit Suisse, and others links gender diversity to better corporate results. The ‘cognitive diversity’ that results from combining workers of different backgrounds improves decision making. And with women often exceeding men in educational attainment, gender diversity widens the talent pool.

Morningstar Gender Diversity indexes emphasize the shares of companies committed to equal opportunity and access. The indexes incorporate 19 gender-related criteria while reflecting the broad equity market. Index analysis suggests that gender-lens investing is linked to both values and value.

How to Index Gender Diversity?

Lack of transparency constitutes a formidable obstacle to corporate-level gender research. According to Equileap, a specialist researcher and partner of Morningstar Indexes, just 17% of companies globally publish information on their gender pay gap, the persistent and pernicious differential between female and male salaries. Corporate Canada is in line with this woeful global norm, and while it outperforms the U.S., where just 8% of companies report on their pay gap, it lags markets like Spain (92%) and the U.K. (75%) that have mandated disclosure.

Company-level disclosure informs Equileap’s Gender Equality scores—the basis for Morningstar Gender Diversity indexes. Roughly 4,000 companies across 23 developed markets in Asia, Europe, and North America form the universe.

Good research on diversity, equity, and inclusion must go beyond numbers. While it's important to measure representation at various levels of a company's labour force, policies, such as parental leave, are also critical to an inclusive workplace. Equileap assesses 19 criteria within four broad categories:

  1. Gender Balance in Leadership and Workforce
  2. Equal Compensation and Work-Life Balance
  3. Policies Promoting Gender Equality
  4. Commitment, Transparency, and Accountability

It’s also key to examine actual behavior. So Equileap evaluates a company's legal record when it comes to gender discrimination and sexual harassment.

The Morningstar Gender Diversity Indexes are derived from their equivalent large- and mid-cap equity benchmarks. They hold most of the same stocks as their parent indexes but tilt constituent weight so that better-scoring companies are overrepresented relative to their market capitalization, while poor scorers receive below-market weight. Companies involved in gender-related legal proceedings are excluded.

Global Gender Leaders 

What are some companies across sector and geography that score well for gender diversity and receive above-market weight in Morningstar Gender Diversity indexes?

  • CIBC is the top scoring company in Canada and one of the 50 top scorers globally on Equileap’s criteria. The bank achieves top scores for gender diversity within its executive ranks, managerial level, and workforce overall. According to Equileap: “The company publishes a living wage policy, a policy for flexible work hours and locations, and gender-disaggregated pay information, as well as a strategy to close the gender pay gap. The bank also has all eight of Equileap’s recommended policies for gender equality, including a supplier diversity programme that promotes women-owned businesses and an antisexual harassment policy. CIBC is a signatory to the United Nations Women’s Empowerment Principles.”
  • National Grid, the British utility, is one of the top five companies globally on gender equality. According to Equileap, it is one of just 19 companies across 23 markets with no gender pay gap. On the representation side, National Grid has achieved gender balance within its board and its executive ranks. The company has strong gender-related policies, pays living wages, and offers generous parental leave.
  • Intuit, the U.S. provider of accounting software, can claim gender diversity within its executive ranks and has instituted policies on abuse, equality of opportunity, and whistleblowing, while promoting career development. It also pays attention to gender diversity within its supply chain. Intuit receives partial credit for the size of its pay gap and parental leave.
  • Takeda Pharmaceuticals stands out within corporate Japan for gender diversity within its executive ranks, management level, and workforce overall. The healthcare business offers parental leave and flexible work and maintains strong policies on training, abuse, whistleblowing, and diversity within the supply chain.
  • Aena, an airport operator, is one of many high-scoring companies from Spain, which introduced new reporting requirements between 2019 and 2021 to combat gender discrimination, according to Equileap. Aena score well for gender diversity within its executive and managerial levels and for its policies, including generous parental leave and flexible work.

Mitigating Risk Through Gender Diversity Investing

What can we learn by analyzing Morningstar Gender Diversity indexes’ composition and behavior as of the first quarter of 2022? From a sector perspective, the indexes tend to devote above-market weight to:   

  • Utilities
  • Energy

Meanwhile, the indexes tend to devote below market weight to:

  • Technology
  • Industrials

According to Equileap, utilities tend to score well for gender diversity at the board level, for training and career development, and inclusive recruitment. Meanwhile, the technology sector struggles with female representation and has a history of sexual harassment.

Regionally, the indexes are tightly constrained in their deviation from market weight. But most of Equileap’s top scoring markets are European, including France, Spain, Sweden, and the U.K. Australia is also a leader, in large part due to strong gender equality legislation, though the state does not mandate paid parental leave. Canada receives slightly above market weight in the global indexes.

The U.S., Hong Kong, and Japan are the lowest scoring markets. According to Equileap’s 2022 Gender Equality Global Report & Ranking, fewer than 10% of companies in those three markets report on their gender pay gaps, compared to 92% in Spain, the global leader. Gender diversity within Japanese companies is the lowest of the developed markets studied by Equileap.

What about returns? The Morningstar Gender Diversity indexes do not have long histories. Their returns thus far look similar to the market, which is by design. Inevitably, the indexes will slightly outperform the market in some conditions and lag in others.

Interestingly, the gender diversity indexes have been less volatile than their broad equity market equivalents so far. During down markets, they have generally lost less. This stems from their preference for companies with economic moats, or sustainable competitive advantages, and businesses with strong financial health characteristics, as indicated by the Morningstar Risk Model. These attributes tend to be more stable than relative returns over time. So, results are encouraging.

Gender diversity, like many of the criteria falling into the environmental, social, and governance investing framework, goes beyond making the world a better place. Companies that create inclusive cultures are tapping into the labour force’s full talent pool while benefitting from cognitive diversity. They are not only advancing the cause of human rights but could also be maximizing shareholder value.

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About Author

Dan Lefkovitz

Dan Lefkovitz  Dan Lefkovitz is a strategist for Morningstar's Indexes group.

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