More than a buzzword

Assessing the financial and transparency effects of corporate gender diversity

By Daniel Getler, CFA, Min Low, and Emily Matthews RAY RESEARCH - ARABESQUE S ARABESQUE More Than a Buzzword Assessing the financial and transparency effects of corporate diversity

Introduction

In recent years, gender diversity has increasingly been recognised as an important issue in the workplace. Using S-Ray® data, supported by academic and industry research, we assess the effects of gender diversity on global public corporations1. In particular, we examine whether more diverse companies demonstrate better financial performance and greater non-financial transparency.

To focus on gender diversity specifically, we examine a composite of quantitative metrics used within our ESG Diversity Feature that are focused on the percentage of women at various levels of the company, including the board, management, and overall employees. These metrics capture the current diversity of the company rather than stated policies. While corporate gender diversity also encompasses the inclusion of non-cisgender individuals, we focus our discussion on women in the workplace due to data availability constraints. We hope to expand this research to include non-binary individuals as more data becomes available.

Corporate Diversity Trends

Gender diversity is increasingly a major topic of discussion among corporations. This year alone has seen several large companies announce that a female CEO will take the reins in 2021. These include Citigroup, the first major Wall Street bank to take this step2; Wellington Management, one of the world’s largest independent investment management firms3; and Mercedes-Benz Canada, which has appointed a female to lead the company as both President and CEO4.

“This year alone has seen several large companies RAY RESEARCH

- announce that a female CEO will take the reins in 2021.”

1. The scope of the analyses is the Arabesque S-Ray Global All-Cap Universe, which closely resembles the Global All-Cap indices of major index providers. Methodology and constituents are available upon request. 2. Jolly, 2020 ARABESQUE S 3. Wellington Management, 2020 2 4. Mercedes-Benz Canada, 2020 Turning to the data, we see that these are not one-off cases. There has been a sharply increasing trend in gender diversity over the studied period (December 2009 – November 2020). We theorize below on the reasons for that increase. However, it should be noted that the median company has a diversity value below 30%5. There is still progress to be made.

Median S-Ray Gender Diversity Composite

There are several potential exogenous factors that may have contributed to this trend. An analysis of the U.K. Labour Force Survey data found that women’s increased participation in the workplace can partly be explained by increasing educational levels. Furthermore, the societal expectations of a woman’s role has changed: women today are less restricted by their marriage and family commitments than ever, as observed by the increasing number of working mothers6.

There have also been several regulatory developments regarding gender diversity over the period studied. Many countries in developed markets - including Norway, Spain, France, and Italy - have enacted quotas at the board level to improve gender diversity7. Countries in Asia Pacific are also following Europe’s lead. The Companies Act of 2013 in

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- India mandates that listed companies have at least one female director . In the United States, many states currently require companies to have at least one female director, with increasing quotas coming over the next two years9.

5. The median of the gender diversity composite metric, which accounts for gender diversity at varying levels of an organisation, is 29.3% as of 30 November, 2020. 6. Roantree & Vira, 2018 7. Valls Martinez, Cruz Rambaud, & Parra Oller, 2019; Bennouri, De Amicis, & Falconieri, 2020 ARABESQUE S 8. Verma, 2018 3 9. Hatcher & Latham, 2020 Finally, the United Kingdom has set a voluntary 2020 target10 of 33% female board representation in the FTSE 350 companies. While this is met collectively, 41% of companies do not individually meet this target11.

These regulatory pressures are not all entirely governmental: some influential companies have also implemented policies to drive diversity forward. For instance, Nasdaq has proposed new listing rules related to board diversity and disclosure wherein companies listed on their exchanges will be required to have at least one female director and one underrepresented minority and/or LBGTQ+ director, and to disclose this data in a standardized fashion12. Additionally, Goldman Sachs will require at least two diverse board members for any US or European company for which they underwrite an IPO13.

The growing sustainable investing landscape is also a likely contributor to the positive trend in diversity. ESG assets under management in the U.S. grew from $3.7 trillion to $12 trillion between 2012 and 2018, and could potentially account for fifty percent of institutionally managed assets by 202514. Globally, ESG assets under management exceed $30 trillion.15 Most notably, there has been substantial growth in thematic and impact investing specific to gender-related issues. Public investment products with a gender lens have grown exponentially from $100 million AUM in 2014 to $3.4 billion in 201916. This trend is seen in venture capital, private equity, and private debt as well, where Public investment products with a gender lens have grown exponentially from $100 million AUM in 2014 to $3.4 billion there has been a 138% increase in funds focused on in 2019. gender issues over the last three years17.

Gender diversity and financial performance

While increasing regulations and the growth of ESG investing are some of the external factors relating to the increase in corporate gender diversity, there are notable internal benefits to companies with greater gender diversity. Over the period of this study, more gender diverse firms outperformed the universe, while less gender diverse firms underperformed. Therefore, the gender diversity “factor” return, calculated by evaluating RAY RESEARCH

- a portfolio that goes long the most gender diverse quintile and short the least gender diverse quintile18, is positive as well.

10. Instead of a gender diversity quota, UK companies are encouraged to increase their board gender diversity in accordance with a voluntary target set in the Hampton-Alexander Review. 11. Department for Business, Energy & Industrial Strategy, 2020 12. Nasdaq, 2020 13. Goldman Sachs, 2020 14. Collins & Sullivan, 2020

ARABESQUE S 15. Global Sustainable Investment Alliance. (2018). 2018 Global Sustainable Investment Review. 16. Enyart, 2020 4 17. Biegel & Hunt, 2020 Returns to Diversity Quintiles

In addition to absolute outperformance, we can see that gender diverse firms also had greater risk-adjusted returns than those with poor gender diversity, as indicated by the Sharpe and information ratios.

Diversity Portfolio Statistics19

Annualized Annualized Tracking Information Name Return Volatility Sharpe Ratio Error Ratio Turnover

Quintile 1 10.38% 14.43% 0.72 3.30% 0.37 60.23%

Quintile 5 4.78% 14.24% 0.34 4.98% -0.81 93.86%

Universe 9.06% 14.31% 0.63 ------26.08%

Long/Short 4.98% 6.31% 0.79 ------60.21%

Furthermore, firms with greater gender diversity tend to have higher profitability and higher valuation multiples, shown here by the median return on equity and price to book ratios. In fact, not only does the most (least) diverse quintile have the highest (lowest) valuation and profitability, but these relationships are monotonically decreasing: quantile 1 is higher than quantile 2, which is higher than quantile 3, and so forth.

RAY RESEARCH “Over the period of study, more gender diverse firms outperformed the universe, - while less gender diverse firms underperformed.”

18. Gender diversity quintiles are calculated intra-industry. In each period, the stocks in each FactSet RBICS industry are sorted by their score on the gender diversity composite. The top 20% of stocks in the industry comprise the top quintile portfolio, while the bottom 20% comprise the bottom quintile. The quintile portfolios are then weighted using each stock's weight in the benchmark. This serves to mitigate the effects of inter-industry differences and more accurately capture the returns to diversity by measuring the performance of firms that are more ARABESQUE S (less) gender diverse relative to their industry peers. 5 19. Metric definitions are listed in Appendix A. ARABESQUE S-RAY RESEARCH 22. 21. Kwok, 2020 20. Institute, Credit Suisse Research 2019 Hunt, Prince, Dixon margins that female that percentage These indicate These firms found include findings - employment Fyle, & Yee, 2018 Fyle, & Yee, while a in positive of positive the : the females a are 2019 top least relationship consistent Median linear and Median quartile on Credit diverse their the relationships Price Return Suisse board on were with stock between To executive Book On previous study, more and prices Equity between within Ratio gender 21 likely which ; gender and academic By By management to Diversity technology Diversity diversity found an underperform diversity analysis and that Quintile Quintile and industry companies had and by outperformed financial McKinsey higher financially financial research, performance with EBIT companies’ that 22 20 . ; a and a shows higher which study EP . 6 ARABESQUE S-RAY RESEARCH The increase diversity 25 24 23 approximately . . . 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Al 26. GHG GHG Protocol requires that emissionsfor reported separately are Scope Scope 1 2,and in and units of tCO2e. have of with score score rise measures more In disclosures greenhouse diversity the Again, - - Qahtani Qahtani & Elgharbawy, 2020 & Zaman, Shaer 2016 a companies greenhouse gas emissions data.” data.” emissions gas greenhouse “Gender diverse companies are substantially more likely to disclose in concrete the relationships either of based likely Percentage these global of Greenhouse 3 the ° C, on missing the to on findings gas temperature example however, extent within company board disclose sector emissions Of studied or Companies are to each Gas inadequate and - of specific indicates greenhouse which websites corroborated this . 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For monthly rebalancing, the formula is Turnover: Name Ratio: Information monthlyreturns, the formula is Error: Tracking monthlyreturns, the formula is Volatility: Annualized is formula the returns, Return: Annualized A : The ratio of annualized returns less the risk Metric The standard deviation of active returns, expressed in units of return/year. For The average number of names newly added or sold completely from the portfolio The ratio of active returns to tracking error. The formula is The geometric average return, expressed in units of return/year. For monthly TE The standard deviation of returns, expressed in units of return/year. For Definitions = TO - free rate has been fixed at 0%. The formula is is formula freeThe rateat 0%. beenfixed has = σ n 12 r 12 i − IR 1 = = = r min SR nms TE , = r nms , R σ , 1 ∑ − , + − + r , r , r nms - , r free rate to the annualized standard , , nms − − r ̅ , , r , − 2 r , 10 ARABESQUE S-RAY RESEARCH Bibliography Enyart, J. (2020). 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African of Journal companies. listed JSE from evidence composition: board and - - 01 do/investing - of - all - sage - - - boards board at - - least - Fyle, S., & Yee, L. (2018). Delivering through Diversity. McKinsey&Company. Diversity. through L.(2018). &Yee, S., Delivering Fyle, 3/ - and - - 08 - members - diversify/ one - - 2019 lending/launch - woman - 222.doi:10.1016/j.jcae.2016.09.001 - 0247 - across - release/nasdaq - - director ideas/gender - - the with - ftse - - - mercedes on gs/pages/commitment - - 350 board - - lens - to Benz Canada Announces Eva Wiese as first female President and CEO. 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