Yasmine de Bray argues it is crucial that active investors monitor companies' commitment to diversity and hold them to account.
A major phenomenon that has accompanied globalization is the widening of inequality. Between 1980 and 2018, globally, the incomes of the richest 1% of people increased twice as much as that of the poorest 50%. Several studies, including from the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) show that the rise of inequality worldwide has negative effects on growth.*
With the rise of ESG pressure, investors are becoming conscious of social risks. Populist political agendas and social unrest movements, such as the League in Italy, are driven by several factors, including inequality. Social unrest can have powerful negative consequences for markets, as seen by the impact of the Chilean unrest. Despite their awareness of the issues, investors have historically lacked the investment solutions that effectively address the long-term challenges of inequality.
We see diversity as a key pillar within our thematic fund designed to tackle social inequality. Diversity is a multi-faceted issue, covering age, race, religion, sexual orientation, disability and gender and is often linked to equality.
The most recent Gender Pay Report by the World Economic Forum suggests that, while progress has been made in delivering gender parity (particularly in Western Europe), the economic gap between men and women is actually widening."
The most recent Gender Pay Report by the World Economic Forum suggests that, while progress has been made in delivering gender parity (particularly in Western Europe), the economic gap between men and women is actually widening. This means that, building the investment universe of our social impact fund, and in particular with regard to gender inequality, we decided to consider several factors when scrutinising a company's profile.
First, has a diversity policy been implemented to encourage the recruitment and professional development of both male and female employees at all levels? Without such a policy, it is difficult for companies to begin the process of altering the attitudes of employees to their own learning and development.
The second is to use quantitative data sources to identify the percentage of women at management level, on the board and in the executive committee and assess if the company can be classified as "diverse" (with 40-60% of employees being female).
Finally, it is essential to assess the company's gender profile in the context of the country in which it is based. This will help determine whether it is outperforming local peers in a bid to "make a difference" and also if it is adhering to regulatory requirements.
Once the company's gender diversity profile has been established, the first way to enact change is to exclude the worst offenders from the fund's investment universe. In the case of CPR-AM's Invest - Social Impact fund, the worst 10% of companies from the MSCI All Country World Index on the grounds of diversity are excluded. Within the context of the five pillars governing the fund's thematic strategy - Labour & Income, Health & Education, Diversity, Taxation, and Human Rights - 50% of companies on this index do not receive direct equity investment.
As an active investor, it is crucial that the company's commitment to diversity is monitored in order to ensure a company uphold its commitments and is held accountable. Regular and transparent reporting of diversity metrics at a company level are invaluable as they help to improve data quality, standardisation and ensure investors can scrutinise progress.
Investing in businesses that champion diversity and seek to resolve gender inequality will develop more socially aware companies that should prosper, since they will find it easier to attract capital, human talent, consumers and regulatory approval. This will have positive implications for their ability to innovate and grow, and as such for their financial performance. Businesses that do not help to reduce all social inequalities, including that of gender, are likely to face greater regulatory, political and reputational risk and struggle to survive long-term.
Much like the environment, social inequality is a critical issue for the 21st century and investors must integrate this dimension in their decisions or else be left behind. It is too easy to think that we make little difference as individual firms when it comes to allocation of capital but, collectively, we can help to create a gender equal world.
Yasmine de Bray is thematic equities portfolio manager at CPR Asset Management.
* "Trends in income equality and its impact on economic growth", 2014, OECD Social, Employment and Migration working papers / "Inequality overhang", 2017, IMF working paper.