Why Gender Lens Investing May Lead to Better Returns

By the end of the decade, American women are expected to control upwards of $30 trillion of the country’s total household financial assets, a dramatic increase from the $10 trillion of assets controlled by women at the start of the decade. Demographics may position women to lead this substantial wealth transfer, and social changes reflect this shift. There has been a noteworthy increase of women assuming the role of family breadwinners, resulting in more women managing their household financial and investment decisions.¹

Despite significant advances made toward greater gender diversity, equity, and inclusion in our economy, there remains opportunity for further progress:

• The gender pay gap in the U.S. remains at 17%²
• Just 30% of corporate board seats in Russell 3000 companies are held by women³
• Only 12% of fund managers are female⁴

At the same time, it is heartening that our clients display real interest and momentum in integrating a gender lens into their investment decisions. According to a recent survey from Morgan Stanley’s Institute for Sustainable Investing, more than half of U.S. investors (59%) are interested in including gender diversity investing themes in their portfolios, assuming these investments achieve similar market-rate financial returns. To this point, 77% of global investors believe that companies seeking to make a positive social change can balance this focus alongside profitable financial gains.⁵

Furthermore, large percentages of high-net-worth investors find it important for the companies that they invest in to have policies in place to promote diversity, equity, and inclusion (66%); hire and promote employees of diverse backgrounds (65%); and have people of diverse backgrounds in leadership positions (61%). Overall, 71% of these high-net-worth investors find it important that their investment portfolio aligns with their beliefs and values and issues that matter.⁶

As we work to further gender diversity, equity, and inclusion, here are a few notable factors influencing the gender lens investing landscape and a few resources to help with your portfolio decisions.

Regulations and Investors Are Changing Corporate Behaviors

In 2021, Nasdaq passed a rule requiring that all companies listed on Nasdaq’s exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors. Those organizations that do not have diverse directors must explain why.⁷

In the U.S., investors can play a role in influencing companies on the topic of gender diversity, equity and inclusion through voting proxies and dialoguing with companies to encourage disclosure.

Specifically, investors have been focused on disclosure of relevant policies and employee diversity statistics. Out of the 527 resolutions filed in the first quarter of 2024, and 7.5% address workplace diversity, continuing to signal that this is an important issue for investors. There were also several resolutions filed seeking racial and gender median pay data to assess enduring pay inequities.⁸

But there has been some movement in the other direction, as well. After a court deemed California’s law requiring a minimum number of minority directors on boards as unconstitutional, the share of women directors in the state began to reverse several years of upward momentum.⁹

Gender-Diverse Companies Have Outperformed, On Average

Studies show that a balance in representation across all genders can help to broaden perspectives and drive better decision-making throughout organizations of all sizes. As it turns out, diverse perspectives have the potential to increase your portfolio’s bottom line.

According to Morgan Stanley Research, a more diverse workforce, as represented by women across all levels of the organization, correlates to higher average returns. When our quantitative team analyzed global companies based on their percentage of female employees and other metrics of gender diversity, companies that have taken a holistic approach toward equal representation have outperformed their less diverse peers by 1.6% per year between 2011 and 2022.¹⁰

Why Has Gender Diversity Translated to Outperformance?

A few possible reasons:

Incorporating a Gender Lens into Investment Portfolios

Just as getting qualified women into the C-suite and the boardroom, female ownership, and developing policies supporting diversity are important, there are other dimensions of gender diversity, equity, and inclusion that motivated investors can also support—for example, investing in companies providing products and services that benefit women and girls. Women, according to the World Bank, represent the majority of unbanked adults globally.¹³ Increasing access to financial services for women, such as bank accounts, can support inclusion and serves as a growing business opportunity as well.

In addition, investors may consider diversity at the asset managers they invest with. Women continue to be underrepresented in the fund management profession; in fact, diverse-owned firms manage less than 1.4% of assets in the U.S.¹⁴ Whether investing in diverse-owned firms or looking at diversity across the leadership and firm more broadly, investors can consider these factors as part of a holistic approach to gender lens Investing. To help create change and identify asset managers that may not be majority diverse-owned but are still showing progress in advancing diversity, Morgan Stanley launched DEI Signal, a quantitative scoring tool to help investors and their advisors further navigate available options.

Once you establish the elements of a portfolio that closely aligns with your values and financial goals, you can work with your Financial Advisor to incorporate some, or all, of the above approaches. One approach is through our Investing with Impact Diversity Portfolios. These options seek to generate broad-based positive environmental and social impact with an emphasis on diversity, equity, and inclusion (DEI). You can also invest in our Impact Solutions basket of stocks that addresses global sustainability themes, such as inclusion, as well as health and wellbeing, resource management, climate change, and safety and security. Finally, you can work with your Financial Advisor to construct a custom portfolio that leverages third-party funds to help achieve your unique social goals.

It is important to create impact investing portfolios to help clients meet their needs, but it’s equally important for you to understand how your money is working to meet your goals and generating better outcomes for society and the environment. As such, we created Morgan Stanley Impact Quotient®, a patented¹⁵ application that enables our clients to evaluate their portfolio on over 100 social and environmental impact preferences, including areas such as diversity in leadership, gender equity and access to finance, education, and health care.

Advancing Gender Diversity, Equity and Inclusion

While there is still work to be done on gender diversity, equity, and inclusion, noteworthy progress has been made. Today, investors have greater opportunities than ever before to make financial decisions that support more equitable outcomes for all. Increasing investor demand enhances the data and transparency driving investment strategies and contributes to robust impact reporting capabilities. If you are interested in applying a gender lens to your investment portfolio, reach out to your Morgan Stanley Financial Advisor to learn more.