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Portfolio > Portfolio Construction > ESG

Women and ESG Investing Intertwine

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In 2015, Chief Personnel Officer Cindy Robbins decided that, after months of deliberating Salesforce’s pay gap issue with a colleague, it was time to tell someone who could do something about it. Robbins brought the issue to CEO Marc Benioff, who subsequently had the $10 billion company spend $6 million over two years to raise its female employees’ pay to be on par with their male counterparts.

The gender pay gap is a well-known issue — with women making in the ballpark of 80 cents for every dollar a man makes. But this 20 cent difference is likely to add up to greater than $1 million over a woman’s lifetime — and that’s only income; it doesn’t include potential investment returns. This inequity, which often begins in a woman’s early 20s (one could argue it starts earlier), has more implications for her life than simply income loss. It affects the way she invests, her family planning, and her retirement needs (it’s a well-known fact that women married to men are likely to outlive them).

In just two short years, women are projected to control two-thirds of private wealth in the United States. Investment advisors, the majority of which are men, cannot afford to be complacent about women and their investing needs. On average, women live four-to-seven years longer than men, and studies show that 70% of new widows fire their financial advisors. It seems like an obvious opportunity.

So why isn’t it? One explanation is that men have traditionally been the financial decisionmakers (men are still financial advisors’ primary contact), the breadwinners, the partner to continue working while their wives temporarily leave the workforce or drop out altogether to raise their family. But this is changing.

In the United States, 49% of women say they work because they are their family’s breadwinner, up from 37% in 2000. One explanation for this is that the rate of single motherhood is on the rise, having nearly doubled from 1974 to 2015, from 14.6% to 26.4%. On the other hand, the perception of women working has changed and is becoming more accepted. In 2000, less than half of all Americans viewed women working while raising children as a “positive development.” Now, 78% of Americans view working moms as a “positive development.”

The financial advisor community should take note that catering to the male-only financial decision-making is an antiquated practice, and it will no longer be good for their businesses. Increasingly, America’s billionaires are self-made women. Last year, roughly a quarter of new U.S. billionaires were women.

Women are not only going to be in control of the majority of private wealth dollars going forward, but also in control of how these dollars are invested going forward. This change will be a missed opportunity for those advisors who don’t actively engage with the women that are currently within their client base and for those who don’t work to understand how women investors think and what is truly important to them.

What Women Want This all leads to an important and fundamental question: when it comes to investing, what do women want? Advisors who understand and acknowledge the differences between men’s and women’s investing habits can tailor their approaches to each. Numerous studies have corroborated the age-old Mars/Venus guide from an investing angle, and the result is a collection of noteworthy takeaways. A study from Fidelity confirms that “although only 9% of women thought their investments would outperform those of their male counterparts, on average, women performed better than men by 40 basis points.” One explanation is the difference in the level of risk appetite that women tend to have versus men.

Studies suggest that women tend to be more risk averse than men. Although this might be viewed as a potential damper on return outcomes, studies also found that women tend to be less likely to be overconfident in their financial knowledge and less likely to trade in volatile markets. On average, men trade 45% more than women, thus significantly affecting their net return outcomes and leading to much higher volatility in their portfolios.

Additionally, women are more likely to seek advice and research their investments; in fact, studies have found that 17% of women spent more than a month researching their investments, versus only 13% of men. The bottom line is that women are more careful in their selection process and tend to take a steadier approach to managing volatility risk.

Women investors also tend to be long-term, goals-based investors. Their financial investments often are based on non-financial goals, including lifestyle improvements, security, and independence, as well as values-based investing. Studies show that women are twice as likely as men to consider sustainability alongside return when investing. Thus sustainable investing is a trend that is likely to keep growing in demand as women control more of U.S. private wealth. Needless to say, sustainable investing should be something that advisors become much more versed in.

ESG Is Investing in Women Cindy Robbins’ 2015 blog post about Salesforce’s equality initiatives not only included closing the pay gap, but also outlined how Salesforce was putting a minimum quota on the number of women who attend executive management meetings and speaking engagements, and ensuring the company interviewed at least one female candidate or underrepresented minority for every available executive position.

Pay equity and employee diversity are two of the most visible and identifiable “social” issues within environmental, social, and governance investing. When we say that women are more likely to consider sustainability when investing, these are the issues we’re talking about. Companies that are closing the pay gap would garner high social scores.

It is not enough to invest in companies that are investing in women by closing the pay gap, employing more women and minorities, and improving community relations and labor standards. As fiduciaries, we have to see these efforts translate into higher returns. We simply cannot lead investors to ESG investments without proving that the return is equal to or greater than the non-ESG investment alternative. And we see these higher returns when there is diversity at the higher levels of an organization.

According to the Peterson Institute for International Economics, a survey of 21,980 firms from 91 countries found that having a woman in the C-suite increases net margins by one percentage point. That represents a 15% increase in profitability for a typical profitable firm in the survey.

Moreover, companies with women in top management positions produce more patents, are more reputable, and have higher retention rates. Part of the explanation is that increasing diversity leads to more and different perspectives, which can increase innovation and avoid “groupthink.”

Many companies are actively promoting women to top positions. Apple is No. 1 on Fortune’s “most admired” companies, with women in 29% of its leadership roles; and of 107 top executives, 19 are women. General Motors has promoted women to four of 17 top executive positions, of which two of its top executives (CEO and CFO) are women. Williams-Sonoma’s CEO is a woman, and women fill 57% of its leadership positions.

Equal pay, board diversity, labor standards, community relations — these are all ESG issues, and they are all women’s issues. For advisors who are looking to expand their client base or be more inclusive of their current clients’ spouses, offering women the opportunity to invest in things they care about can be a differentiator. Women investors want to invest in sustainable companies without compromising returns; part of being sustainable is investing in women. One could argue that it’s a triple bottom line. Who wouldn’t get behind that?

Emma L. Smith serves as research analyst with the ESG Risk Management team for Sage Advisory Services in Austin, Texas. Jessica A. McHugh is director of marketing communications for Sage Advisory. For more insights visit sageadvisorycom.


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