Julie Bech, co-Portfolio Manager of Nordea’s Global Gender Diversity Strategy

International Women’s Day presents a good opportunity to reflect on how Gender Diversity (GD) impacts not only boardrooms, but investment portfolios as well. In past years, we have seen increased focus on this issue, creating opportunities for active managers and enabling us to bring the new dimension of GD into the growing ESG investment movement.

The quest for gender equality has been going on for decades, and we have crossed several milestones. Investment wise, one of the most significant is the recent creation and distribution of the UN Sustainable Development Goals (SDGs), which have already played a big role in empowering society to achieve a more sustainable world. They have shone a light on specific ESG issues and led to a higher demand for sustainable solutions. Investors’ interest has increased and data in these areas has improved significantly. This has made firms more aware of their own impact on the world and the importance of that impact.

The engagement or exclusion question intensified recently during the COP26 climate summit, with many participants calling for investors to essentially shun all high carbon emitters – particularly companies operating within the mining sector. In addition to climate considerations, investors understand the mining industry has exposure to many other significant sustainability risks – including those related to worker safety, biodiversity protection, and the protection of human rights and livelihoods.

Although environmental elements have attracted most of the attention, social issues have also benefitted from the trend, albeit to a lesser degree. As our understanding of sustainability evolves, we expect more focus to be paid on the social aspect of the SGDs – including SDG #5: Gender Equality.

The business case for gender diversity

In the corporate world, gender diversity resonates as giving equal opportunities and conditions to individuals based on capabilities, regardless of their gender. But besides being key for an equal society it also pairs well with traditional return drivers. Gender diversity indicators therefore serve as an extra layer to the traditional investment process.

The debate over the connection between gender equality and stock performance is rapidly moving from the theoretical to the empirical, as evidence mounts demonstrating gender diversity can indeed make economic sense. Indeed, the business case for gender diversity is well-documented. A 2018 Nordea study analysed 100 Nordic listed blue-chip companies from 2004-2016. The study found that firms with the most gender-diverse management had 40% lower volatility in ROCE (return on capital employed). The companies in the study with more gender-diverse boards of directors also had significantly lower volatility in returns, although the results were most striking at the group management level. The study shows that the top 10% of those stocks generating the most stable ROCE outperformed the rest of the total group by 75% over 17 years.

McKinsey & Company’s 2020 global study of more than 1,000 companies in 15 countries found that organizations in the top quartile of gender diversity were more likely to outperform on profitability—25% more likely for gender diverse executive teams and 28% more likely for gender-diverse boards. At the other end of the spectrum, companies in the bottom quartile for both gender and ethnic/cultural diversity were 27% less likely to experience profitability above the industry average. Researchers measured profitability by using average EBIT margins As companies increasingly understand that greater diversity pays off, the push for gender diversity is perceived as a driver of corporate value creation and competitive advantage. We believe that companies that promote and favour diversity can achieve better results.

¹ Nordea On Your Mind, Diversity as a value driver, Johan Trocmé and Ellen Benktander, 20.02.2018.
² Sundiatu Dixon-Fyle, Kevin Dolan, Vivian Hunt, and Sara Prince, Diversity Wins: How Inclusion Matters
(McKinsey & Company, May 19, 2020)

Extending Gender Diversity to investment portfolios

When actively selecting investment opportunities, we look closely at the gender diversity indicators. We consider the level of diversity in higher leadership levels, promotion and career development opportunities, inclusion and the change in these gender diversity indicators. This gives us an indication of the level of Diversity and Inclusion (D&I) in the company, in which areas they excel and in which areas they need to step up. This is also information that we use in the engagement process.

The companies in our investment universe must all live up to a minimum threshold in regards to gender diversity. This threshold is based on gender diversity in higher leadership levels as cultural change in an organisation needs commitment from the top. Breaking the glass ceiling and ensuring equal opportunities in top levels will benefit women throughout the organisations going forward. Focusing on diversity further highlights internal shortcomings with regards to maternity leave, recruitment of talent of both genders, etc.

The competitive edge these companies get from being diverse and inclusive is relative to peers. This means that the power of gender diversity indicators lies within stock selection. Consequently, we tend to be fairly region and sector neutral, relative to the market when selecting investment opportunities. We also prefer companies that – relative to their peers – are better positioned in regards to their overall Gender Diversity score. However, we also seek to capture companies that are improving in regards to their diversity measures, and sometimes these are not yet the companies with the best ranking.