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Funds aren’t ESG unless they consider diversity

ESG fund managers must look at diversity when making investment decisions, and more of them should be women themselves

The benefits of having a more diverse leadership team are well known. For example, in 2012, Credit Suisse’s Gender Diversity and Corporate Performance report found that companies with more women on the board or at top management levels “exhibit higher returns on equity, higher valuations, and also higher pay-out ratios”. In fact, organisations with female board representation outperform those without by 26% in share class performance, the report said.

Investors are increasingly focusing on the gender make up of companies as part of their investment decisions. “Investors are rightly increasingly focused on the practices of the firms they work with, driving changes in behaviour including commitments to gender diversity,” Debra Walton, chief revenue officer, data and analytics, at the London Stock Exchange Group, told Last Word Research.

A fund claiming to be an ESG that does not support gender diversity in any way is side-stepping a major area not only of our times, but also of consideration under the definition of social issues, added Darby Hobbs, CEO and founder of SOCIAL3, a firm focused on fusing brand and sustainability principles for asset growth through the lens of ESG.

See also: – Investment groups calling for better diversity must look inward

We have already seen that by not catering to the expectations of investors when it comes to gender diversity there is a risk of missing out on better performance and greater returns, as supported in the Credit Suisse report. However, Hobbs believes there is another risk of potentially misleading investors.

While she acknowledged that “the development and thereby definition of an ESG fund is left to individual and portfolio reviews” Hobbs believes that “to not include gender diversity and yet claim you are an ESG fund is a misleading component that often, at times, confuses investors and leads towards misunderstanding the integrity and significance of ESG funds”. 

Women fund managers

Considering gender diversity applies not just to the components of a fund, but to the management team of the fund itself.

“It would be good to see metrics on gender, not just within the fund, but in terms of the team managing it, and perhaps a statement of policy on gender at the same time,” noted John Fleetwood, director of 3-D Investing.

See also: – Dave’s World: The results of applying a gender filter to our Responsible Ratings Index

According to Morningstar, in the UK, there are still more fund managers called Dave than there are women fund managers. With 45 women fund managers running just 95 funds between them, this is the equivalent of just 7.7% of the UK-domiciled funds.

In Last Word Research’s own analysis of the Responsible Ratings Index (RRI), only 17 funds out of 94 listed were found to have a woman as part of their fund management team, with only two funds from the entire RRI being made up exclusively of women.  In fact, they make up just 1% of funds which make it onto the full RRI. For comparison, 5% of these funds have a manager named David.

The industry must ensure more women are brought into fund management roles, as well as increasing the focus on diversity as part of ESG investment decisions.