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Media & Insights: Latest News

ESG plays an essential role in closing the gender equity gap

Responsible investment, of which Environmental, Social and Governance (ESG) principles are a key tenet, is becoming increasingly mainstream but it is the social element, particularly gender diversity that has become increasingly topical in the investment world. The need to improve gender equity on the Boards of Directors of public companies and at Senior Executive level is one of the key areas we’ve prioritised internally and seen grow in importance externally.

What is Diversity, Equity, and Inclusion?

Diversity, Equity and Inclusion goes beyond the narrative of implementing policies, procedures and staff-count. Diversity is considered when there is a presence of variety or differences within any given setting. These may include, but is not limited to unique characteristics, backgrounds, experiences, or perspectives. Equity in this context refers to the practice of ensuring that everyone is provided with equal, unbiased resources and opportunities required to reach an equitable outcome. Inclusion in the workforce is defined as the active state of being included and the sense of belonging.

Diversity thinking: The “Why”

Growing evidence shows that companies can only reach their full potential if they truly embrace diversity, with equitable gender representation on boards and at a senior management level. The 30% Club, a global campaign led by Chairs and CEOs to increase gender diversity to 30% at board and senior management levels asserts that only those organisations that foster truly inclusive cultures - cultures that embrace women who look, act and, importantly, think differently - will reach their full potential to positively impact their people, their markets and their communities. Their position is further supported by research from the Coalition for Women in Government that confirms boards with greater diversity are more effective. Diversity, including gender balance, drives innovation because individuals have different ways of approaching challenges and finding solutions.

Recent research also finds that when women join boards, they contribute more than men to the diversity of functional experience, which is often missing at board level. Women are found to possess a wider range of functional experience than their male counterparts and thus women board appointments expand the breadth of skills.

Investors are increasingly incorporating gender diversity and equity considerations in their company assessments because JSE-listed companies are required to have a gender policy at board level. According to a recent study by PWC, of the South African non-executive directors (including chairpersons), only 5% of women are in CEO positions in Africa - falling significantly short of the 50% target. Of those, there’s only one female CEO in the top 40 JSE listed companies, Maria Ramos, CEO of Absa Bank.

Does female representation positively impact firm performance?

Investors are constantly looking for evidence that shows whether investing with an ESG lens generates superior returns compared to traditional strategies. Research from the MSCI World Women’s Leadership Index, which represents the performance of companies that are committed to achieving gender diversity on their board of directors and in leadership positions, showed that US companies with at least three women on the board of directors between 2011 and 2016 experienced median gains of 10 percentage points in return on equity (ROE) and earnings per share (EPS) of 37%. S&P Global research also highlights that firms with a high gender diversity on their board of directors have been more profitable than firms with low gender diversity.

According to ISS ESG research, strong female representation at senior corporate levels was associated with better financial returns. Boards with at least two women outperformed the average Russell 3000 returns over 3-, 4-, and 5-year periods, while male-dominated boards underperformed the index over the same periods. Over a holding period of four years, the spread between the two groups was greater than one percentage-point annually.

 

Figure 1: Russell 3000: Average Annual Active Return

Source: ISS ESG as at 27 October 2021

Prescient’s approach

At Prescient, we have adopted a systematic approach to ensure unbiased ESG screening through our in-house ESG-scoring tool. The “Prescient ESG scorecard” is quantitative and data-driven, with data dating back to 2008. This process is integrated across our entire investment process by providing an in-depth measure of each ESG pillar when considering investment opportunities. Given our integrative investment approach to ESG, it enables us to value investment opportunities on a risk-adjusted basis.

When assessing Diversity, Equity and Inclusion, we incorporate metrics in both the “S” and the “G” components of ESG. Board structure, Independence and Diversity are some of the key factors in the “Governance” pillar. These factors consider (among others), the percentage of non-executive directors, whether there is ESG-linked compensation for the Board, the percentage of women and female executives on the board.

Vital to this is Diversity at the workforce level, which falls under the “Social” pillar. Here, we consider the make-up of the Employee base. We consider (among others) the ratio of women relative to the workforce, as well as the percentage of women and minorities in management and senior positions. This process, along with targets set by companies, allows us to assess the progress being made and ensures the potential for greenwashing is diminished.

Importantly, our corporate DNA embraces the mutually reinforcing values of commercial success, long-term sustainability, and investing for positive change. Notably, we do not believe in exclusionary practices and make it clear to our investee companies that we positively view sustainable practices. Companies who embrace and meet sustainable targets are thus more likely to improve their cost of funding and/or garner further support from us.

The way forward

With the increased focus to enhance corporate governance, ESG strategies and high-quality disclosures, key considerations in any boardroom discussion today should also centre around closing the gap on gender equity. To date that shift towards gender diversity has not been sufficiently significant even though the benefits are clear. Thus, companies should be doing more to promote and implement transformation in order to close the gap for gender and racial diversity on boards. 

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