Cover Story: Going for equality

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on August 20, 2018 - August 26, 2018.
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Gender lens investing has made much headway in the past few years. Today, there is a growing number of investment vehicles, such as mutual funds and exchange-traded funds, that utilise the strategy not only for the potential returns but also to promote greater gender equality.

This practice, which promulgates the use of investment capital to alleviate the economic plight of women and girls while earning a financial return, has existed unobtrusively for decades. It was not until the last five years or so that this approach started making its way to the mainstream.

Gender lens investments grew 41% to US$910 million as at June 30 last year, from US$645 million in 2016 and US$100 million in 2014. An analysis by US-based Veris Wealth Partners, in collaboration with Catalyst At Large, points out that growth in assets under management is a “powerful signal” that investors want more options when it comes to putting capital to work for the benefit of women and girls to create a thriving economy and equitable world for everyone.

Socially astute investors have been pushing boards of directors to be more inclusive in terms of gender pay disparity and inculcate fairer practices for decades. Mainly bolstered by the advocacy work on empowering women and the inclusion of women empowerment and poverty alleviation in the UN’s Sustainable Development Goals (SDGs), it is clear that the methodology is here to stay.

Gender lens investing is sometimes seen as investing in female entrepreneurs. But that is not the only lens one can apply, says Shuyin Tang, a partner at social venture capital firm Patamar Capital. It is also the practice of integrating a gender analysis during the investment evaluation process to make better investment decisions so as to achieve better outcomes and promote gender equality.

Patamar invests in scalable businesses that improve the livelihood of the working poor. Its funds invest in agriculture, healthcare, education, financial inclusion and e-commerce/distribution platforms across Southeast Asia (with a focus on Indonesia, Vietnam and the Philippines) and India.

The firm uses the principles of gender lens investing in its investment evaluation process. “We do not limit ourselves to investing in women-led companies but rather, ask gender-related questions at each step of the investment process to fully understand how gender plays a role in many areas. This includes macro-economic factors, industry or sector dynamics, our own biases (if any) — a factor that our potential investee companies care about when making business decisions,” says Tang.

“We believe that it uncovers our and our potential investees’ blind spots and biases when it comes to the way we understand customers or stakeholders of an industry and the industry itself. By doing so, we are better able to understand the risks and opportunities of our investments.”

Patamar’s targeted investors are those excited about emerging-market opportunities and interested in backing scalable companies with measurable social impact, she adds.

Global Impact Investing Network CEO Amit Bouri stresses the huge opportunity and the crucial role of investments in spurring the growth of gender lens investing. The network’s members comprise impact investors (asset managers and asset owners) and service providers engaged in impact investing such as the US Agency for International Development, the Ford Foundation and Omidyar Network.

“We have seen this become a major issue for impact investors globally. This has really changed the way investors look at it in the last few years,” Bouri tells Personal Wealth.

“The latest findings show that a vast majority, which is about 70% of respondents, are applying a gender lens to their investment process. Beyond financial returns, this is really an opportunity to have a positive impact on gender equality around the world.”

 

The drivers

One of the reasons for this practice is the fact that despite overwhelming statistics on the importance of women’s role in the global economy, this demographic continues to have less access to capital around the world.

For example, the McKinsey Global Institute declared in 2015 that advancing women’s equality could add US$12 trillion, or 11%, to global growth by 2025. This is equivalent to the current gross domestic products of Germany, Japan and the UK combined.

“If women — who account for half the world’s working-age population — do not achieve their full economic potential, the global economy will suffer. We consider a ‘full potential’ scenario one in which women participate in the economy identically to men and find that it would add up to US$28 trillion, or 26%, to the annual global GDP by 2025 compared with a business-as-usual scenario. The impact is roughly the size of Chinese and US economies combined today,” states the research arm of the global management consulting firm.

Despite that, The power of parity: How advancing women’s equality can add US$12 trillion to global growth report says that even after decades of progress in trying to make women equal partners of men in the economy and society, the gap remains large. Similarly, the International Finance Corporation and the World Bank found that a US$320 billion global credit gap prevents female business owners from accessing the capital and land they need to start, expand or formalise their businesses, which not only prevents their and the world’s economic growth but also makes them more vulnerable. By some estimates, women are expected to account for two-thirds of global consumer spending by 2028, says Tang.

Another reason for the growing adoption of gender lens investing is the emergence of civil rights initiatives such as the #MeToo movement — a global effort against sexual harassment and assault. The movement has signalled the collective power and value of women and is said to have a cascading effect, resulting in a lot more awareness of the direct and indirect impact on the segment.

Considering these factors, investors have come to realise that the push to improve gender parity, better access to capital and credit for women, workplace diversity and equality could augment the bottom line of their portfolios. It is this amalgamation of gender and investment that has spurred financial markets globally to quantify the benefits of gender inclusion and uncover investor appetite. In fact, investment strategies that focus on improving the lives of women and girls, close the gender pay gap or add women to corporate boards attracted more than US$2 billion in public and private assets last year.

 

The role of women

The significant role that women play in the global economy is one of the factors driving growth in this area, says Dr Julia Newton-Howes, CEO of Investing In Women, a fund of funds that provides financing to impact investors who provide capital to women-owned and women-led small and medium enterprises (SMEs) in Indonesia, Vietnam and the Philippines.

According to Newton-Howes, the capital needs of women-run SMEs typically fall into the US$250,000 to US$2 million category for various investment ticket sizes. She reiterates that the motivation for gender-focused strategies is frequently inspired by the demands of clients such as asset holders and capital providers.

“We are witnessing a groundswell of global interest in investing in women, whether from the recently launched US$1 billion Women Entrepreneurs Finance Initiative and US Overseas Private Investment Corporation 2X’s US$350 million initiative, or funders such as the Gates Foundation (US$170 million) and the Sasakawa Peace Foundation’s Investing in Women Fund (US$100 million),” says Newton-Howes.

“Moreover, the G7 recently announced the 2X Challenge, which seeks to mobilise US$3 billion in development finance institution commitments that provide women in developing markets with improved access to leadership opportunities, quality employment, finance, enterprise support and products and services that enhance economic participation and access.”

A recent study on venture capital found that funds (58 of them) that invest with a gender lens topped US$1.3 billion, she points out. “And half of them were launched last year. These are exciting times for investing in women.”

For example, Investing In Women — an initiative of the Australian government to catalyse inclusive economic growth and poverty reduction in Southeast Asia — uses the gender lens filter to spot opportunities and get in on the ground floor. It focuses on impact investing, with the aim of incentivising and catalysing investments in women-owned and women-led SMEs.

Gender lens investing can be done in two ways, says Newton-Howes. “First, it can be used to remove or redress the disadvantages faced by women such as their limited access to capital or assets. Second, it can help investors to understand gender as a factor in their investment decisions, thereby reducing risk and enhancing investment outcomes,” she adds.

“More investments are needed to drive broad-based and inclusive growth, particularly for women. Unfortunately, women entrepreneurs face daunting challenges in gaining access to productive capital to grow their businesses.”

Newton-Howes points out that economic growth is more robust and sustainable when women and men participate fully in the labour market. “As many as 70% of women-owned SMEs in the formal sector of developing countries are unserved or underserved by financial institutions — a financing gap of about US$287 billion. In East Asia and the Pacific, this financial gap reaches US$68 billion. And small enterprises (most of which are women-owned or women-led) are disproportionately affected by the credit gap.

“Why do these issues matter? And why should they matter for impact investors? Closing the gender credit gap for women-owned SMEs can drive global growth by boosting income per capita 12% higher by 2030,” she says.

Newton-Howes says women are accumulating more global assets as more of them are participating in the job market. “Women now control US$39.6 trillion, or about 30% of the world’s wealth — up from 25% five years ago. The total assets under management held by female investors worldwide grew an annualised 8% in the past five years on average. Assets held by women in Asia-Pacific ex-Japan experienced the highest growth of 13% a year in the past five years,” she adds.

Despite the evidence that gender equality has a transformative effect on productivity and growth, women’s full economic and productive potential remains unrealised in Southeast Asia, as in many parts of the world, says Newton-Howes. “To put it simply, we are not yet capturing the benefits of fully integrating women into our economies. Until we ensure that women can access the same opportunities as men in senior management or in running their own businesses, our economies will continue to perform below their potential,” she stresses.

Patamar is one the firms that Investing In Women works with to address this gap. It also works with the Small Enterprise Assistance Funds, Root Capital and Capital for Development Partners.

“Partnering directly with impact investors and ecosystem builders, Investing in Women looks to address investor biases — whether explicit or implicit — against women-run SMEs,” says Newton-Howes.

To the argument that gender lens investing may not be as financially advantageous as more traditional investment approaches, authors Joseph Quinlan and Jackie VanderBrug assert that returns and such strategies need not be mutually exclusive. They recognise that it is still early days for gender lens investors, but initiatives such as the SDGs — which require unprecedented scaling of markets and the participation of the public and private sectors — and the coming together of 65 stock exchanges from around the world to collaborate on “Ring the Bell for Gender Equality” in celebrating International Women’s Day 2018 are among the major developments that will influence the pace, breadth and quality of adopting this investment strategy.

Tang prefers to look at the approach as a means of risk mitigation. “Some people have tried to make the case that investing in female entrepreneurs or more diverse teams will lead to better returns than investing in all-male teams. This could potentially set up an unrealistic expectation of performance. After all, why should women have to perform better than the status quo to be considered investable?” she says.

“Instead, I would like to frame the impact of gender lens investing more around risk mitigation and the ability to see opportunities that we would otherwise miss. By using gender analysis in each step of the investment process, we are able to confront our biases and those of entrepreneurs whom we are looking to invest in. We look for entrepreneurs who are able to do the same kind of analysis because they are the ones who deeply understand their customers, suppliers and industries.”

As gender analysis is imbued into each aspect of Patamar’s investment thesis and portfolio management, the approach is deeply ingrained in the way it operate as a fund, says Tang. Thus, applying a gender lens does not limit the kinds of companies that it looks at for potential investments.

She stresses that it is an extra lens that enables the firm to better assess opportunities. “Currently, we have a fund dedicated to female entrepreneurs, namely the Investing in Women fund. Although the focus is on female entrepreneurs — which is just one pillar of gender lens investing — we have been able to learn and practise gender analysis and then take what we have learnt to apply in our main fund (which focuses on impact businesses that bring about better economic

opportunities for low-income communities).”

Tang points out that gender lens investing is applicable across all asset classes. “One could argue that it may be more challenging to apply a deep gender lens to public equities as the businesses are typically very large and not as nimble. In these large organisations, it may be challenging to make the necessary changes to the ways they work with their suppliers or the way they build products or services, for example.

“So many gender lens strategies in the public equity space look at diversity on boards or the management team, for example. This is, of course, valuable but can sometimes stop at ‘counting women’ versus deeper gender analysis. However, one could also argue that such established businesses could have more resources at hand to collect and analyse sex-disaggregated data or could have the power to set trends in their respective industries. All in all, yes, I think gender lens investing should be applied to the entire portfolio.”

 

Positive returns so far

Although gender lens investing is still a relatively small field, the marketplace for investable solutions is growing fast. In the past 12 months, products and indices that employ gender lens metrics and strategies have shown positive returns.

The RBC Vision Women’s Leadership MSCI Canada Index ETF, a women-focused exchange-traded fund, tracks Canadian companies that have demonstrated commitment to gender diversity as part of their corporate social responsibility strategy. The ETF, which also tracks the MSCI Canada IMI Women’s Leadership Select Index, saw a return of 7.72% for the period between March 8 and Aug 2. The fund began trading on Toronto’s Aequitas NEO Exchange in March.

The UBS Global Gender Equality UCITS ETF, which was launched in January, tracks the Solactive Equileap Global Gender Equality 100 Leaders Index. It is designed to track the leading companies in gender equality. It saw a return of 2.56% for the year to Aug 14. The ETF is listed on Zurich’s SIX Swiss Exchange.

The SPDR SSGA Gender Diversity Index ETF (SHE), which was launched in March 2016, has seen a return of 8.69% over the past year. SHE holds stocks of companies that have a higher percentage of women in high-level leadership roles. The fund evaluates the 1,000 largest US firms on the ratio of women on boards of directors and in executive positions. The ETF is listed on the NYSE Arca.

The FTSE Women on Boards Leadership Index, which was launched in February, enables investors to have greater exposure to companies that demonstrate gender diversity leadership at the board level and have strong social impact. According to its fact sheet, the index had risen 10.2% over 12 months as at July 31.

The Bloomberg Gender-Equality Index — which measures gender equality across internal company statistics, employee policies, external community support and engagement as well as gender-conscious product offerings — had risen 18.08% (as at Aug 14) since it was launched in 2016.

 

Why gender lens?

The reason that the focus is on gender, and not specifically women, is because the term includes the roles, responsibilities, privileges, relations and expectations of women and men, say authors Joseph Quinlan and Jackie VanderBrug in their book, Gender Lens Investing: Uncovering Opportunities for Growth, Returns, and Impact.

“A gender lens can add perspective to nuanced geographical differences and social expectations. For instance, a multinational consumer goods company operating in India would recognise that an Indian mother-in-law’s often-significant role in family purchasing decisions differs by geography and class. A bank may find sharpening its gender analysis of the lifetime value of male and female banking customers — including loan size, loyalty and referrals — reveals unexpected insights into new profitable segments,” they add.

“A lens brings out indirect and understated aspects of gender that otherwise would be missed or misunderstood. You may, for instance, be reading this with the benefit of a pair of glasses. Imagine that out of one lens you see particular realities, needs, participation and perception of women and out of the other, you see the realities through both lenses, you see the realities (obstacles and benefits) of everyone with fresh eyes. With gender lenses applied, you see clearly and differently.”

The authors stress the importance of differentiating between efforts undertaken by philanthropic organisations to invest in women and girls and gender lens investing. “Gender lens philanthropy, or gender lens grant-making, is essential for under-resourced work. These organisations look for social impact, not financial returns. Gender lens investors’ return aspirations vary from those willing to accept below market risk-return profiles to those seeking market outperformance. With gender lens investing, the fundamental concepts of seeking alpha and reducing beta remains,” they add.

“It is all in how you define them. It is also about how the questions are framed. How do we use gender to make calls on risk and growth more accurate? In early-stage drug companies, how may investors value the knowledge that a company was required to use in sex disaggregated drug testing? How may sovereign debt ratings be correlated to maternal mortality numbers?”