Tag: Impact Investing

I started my career over two decades ago at the socially responsible research and index firm KLD Research & Analytics (which was acquired by MSCI in 2010). From this vantage point, I have watched environmental, social and governance (ESG) investing garner more and more acceptance and enthusiasm in the market. It is an exciting, compelling time to help define and shape the field of ESG as investors tackle some of the most urgent environmental and social issues of our time, from climate change to social inequalities. I have long been passionate about women’s advancement and inclusion in the workplace — MSCI ESG Research’s recent studies have found that diversity has been a compelling element of human capital management for long-term corporate resilience.

With International Women’s Day just behind us, we looked at the relationship between some of the most innovative publicly listed companies in the world — including Amazon.com Inc., Nike Inc. and Visa Inc. among others — that have something in common that you might not expect: more women on their boards than their industry peers. They also tended to have stronger diversity and inclusion programs.

We examined constituents of the MSCI ACWI Index that had been recognized as innovators on one or more annual lists produced by Forbes, Fast Company, MIT Sloan and the Boston Consulting Group between 2015 and 2018. All told, there were 202 index constituents in 42 industries over three years, with the majority (161) clustered in 17 industries, such as software and services, pharmaceuticals and automobile manufacturers. Strong female presence on the board was a defining feature of these companies compared to others in their industries.[1] They were also about 1.5 times as likely to have quantitative diversity targets for recruitment and/or senior management dedicated to overseeing gender diversity and inclusion initiatives.

Innovators Tended to Have More Female Directors

While we can’t tell what’s cause and what’s effect – a culture that embraces new ideas might also be a culture that values gender diversity – there’s research suggesting that more diverse groups are more creative.[2] And our analyses have found that companies with more women on the board also tended to have more gender-diverse workforces and senior leadership teams.[3] Investors interested in innovation capacity might do well to take a hard look at board gender diversity.

Further Reading on the Topic:

The Tipping Point: Women on Boards and Financial Performance

A growing body of research shows that having three women on a corporate board represents a “tipping point” in terms of influence, which is reflected in financial performance. U.S. companies that began the 2011-2016 period with at least three women on the board experienced median gains in Return on Equity (ROE) of 10 percentage points and Earnings Per Share (EPS) of 37%. In contrast, companies that began the period with no female directors experienced median changes of -1 percentage point in ROE and -8% in EPS over the study period. However, a causal link was not established.

Women on Boards Progress Report 2018

MSCI ESG Research has been reporting annually on the state of women’s representation on corporate boards of directors since 2014. As part of this evolving series we have added other areas of interest, relevant to the investment case for gender equality on boards, the differences in compensation regimes between male and female CEOs, and market specific corporate gender diversity issues, such as in Japan, and industry specific issues, such as those in Financials companies. This latest paper in the series provides an update on the state of female representation on corporate boards and in senior management for MSCI AWCI Index constituents as of October 16, 2018.

Women on Boards: One Piece of a Bigger Puzzle

Previously, we have asked whether the number of women on boards has a relationship to corporate financial performance. Research suggests that it has. But is that the whole story? Does the number of women on boards reflect companies’ overall approach to managing human capital and their financial performance?

In its Sustainable Development Goals for 2030, the United Nations set out a vision of a world that includes economic growth, increases in productivity and the eradication of gender discrimination so that women have “full and effective participation and equal opportunities for leadership at all levels.” Our latest research suggests the connection between these goals is relevant to investors.

Women on Boards and the Human Capital Connection

Studies have asked whether having multiple women on a board of directors has translated into better financial performance. But is that the whole story? Does the number of women on boards relate to a company’s overall human capital policies and its financial performance? Our findings suggest that the whole is greater than the sum of the parts. Companies with both a more diverse board and stronger talent management practices enjoyed higher growth in employee productivity compared to companies with a diverse board only and to companies with strong talent management practices only.

Article by Meggin Thwing Eastman, Head of Impact and Screening Research for MSCI ESG Research, which includes business alignment with the UN Sustainable Development Goals, controversies, global norms, and involvement in controversial business activities such as tobacco, weapons, and fossil fuel extraction. She has authored numerous research insights and guidance for asset owner and asset managers seeking to incorporate ESG considerations into their investment process. Corporate gender diversity is an area of particular focus.

Recent publications include The Right Stuff: Talent Management and Innovation, Institutional Investing for the SDGs (with the OECD); Women on Boards and the Human Capital Connection; Bitter Pills: The US Opioid Crisis and Potential Impact on Healthcare Companies; Investor Responses to Gun Violence in the US; The State of Investing for SDG Impact Through Public Equities; and Has Gender Pay Parity Arrived in the Executive Suite? Meggin has worked in the ESG field since joining the former KLD Research & Analytics in 1998. She holds a BA from Williams College and an MA from the University of California, Berkeley.

Article Notes:
[1] There were too few recognized innovators per industry for meaningful analysis of the rest of the sample. A “longstanding critical mass” of female directors was defined as at least three women on the board over three consecutive years from 2014-2016.

[2] For example, see Hewlett, S. A., M. Marshall and L. Sherbin. (2013). “How Diversity Can Drive Innovation.” Harvard Business Review; “Fostering innovation through a diverse workforce.” (2011) Forbes Insights

[3] Eastman, M. T. and D. Rallis. (2016). “The Tipping Point: Women on Boards and Financial Performance.” MSCI ESG Research

When I began working to make boards more gender diverse in 2001, the percentage of women on the boards of large companies in the United States was around 12 percent.[1] By 2011, women had gained a few more seats at the table,[2] and by 2016 women held 21 percent of board seats at Fortune 500 companies.[3] At this rate of progress — less than one percent increase per year — it will be three more decades before big companies’ boards achieve gender parity. And that, sadly, is the good news.

At smaller companies it will take even longer to reach board gender parity at the current rate of progress. In 2016, the average board of a Russell 2000 company had 12 percent women, compared with 20 percent in the S&P 500, and more than one-third of the companies in the Russell 2000 had all-male boards.[4] For minorities, the percentages are even narrower at both large and small companies.

We have known for many years that diverse groups do a better job with decision-making than homogeneous ones.[5] Moreover, there is a great deal of research showing that having more women in decision-making positions is correlated with better financial performance, and often with better risk management and lower risk of insolvency.[6]

Despite all these findings, the pace of change could be described as glacial, even when “glacial” meant the rate of progress of glaciers before climate change speeded them up. I’ve attended scores of conferences on diversity and heard many CEOs and other senior executives speak compellingly about the benefits of diversity and their own personal commitments to improving it — and then say “but of course, that will happen. We don’t need regulation.”

That was also the thrust of an October 2018 article in the New York Times, “Diversify the Boardroom, Just Not Like California.”[7] The main message: There are better ways to make progress than passing a law, as California did last year, mandating that boards include specified numbers of women by specified dates.

I’m sympathetic, up to a point. It’s almost always preferable to rely on market mechanisms to bring about change, compared with the sometimes clumsy and heavy hand of regulation. Look at what’s happened to coal, the most carbon-intensive fossil fuel, as a result of concerns about its impact on air pollution and climate change: The U.S., which once relied on coal for more than half its electricity use, has been retiring coal capacity at record rates and not building any new coal plants. Now coal creates less than one-third of our electricity, and it’s still dropping. Almost none of that happened as a result of regulation; as Michael Bloomberg famously said, “Obama didn’t kill coal. The market did.”[8]

Clearly, when business leaders want to make something happen, they often can. The fact that board diversity is happening at sloth speed in the United States — which, unlike several other countries, has not mandated it — says that our leaders don’t seem to see it as enough of a priority to make it happen faster. What do you do when something that should happen doesn’t? Mandate it.

Yes, mandates have drawbacks. Those who dislike board diversity mandates often point to a study of what happened when Norway mandated that boards be at least 40 percent women in 2006, which showed that, for awhile after the mandate took effect, performance suffered as board composition changed. Could that happen with the California law? Perhaps, but the California law does give companies several years to achieve acceptable diversity. Moreover, that one study doesn’t “prove” that board diversity mandates harm financial performance, particularly in light of the fact that it’s not just about Norway anymore. If that harm were an expected consequence of a mandate, we’d expect to see underperformance in all the countries that have such laws, which now includes Belgium, Italy, France, Germany and India.

Several other countries have comply-or-explain statutes that require companies to have certain levels of diversity or explain why they don’t. That includes countries like Australia and Great Britain. In short, if mandating board diversity were reliably penalizing financial performance, we would not expect to see studies like MSCI’s 2016 report showing that companies around the world (not just Norway) with three or more women on corporate boards enjoyed a higher return on equity of 10.1 percent per year, compared with 7.4 percent for companies that didn’t.[9]

Another objection to such a law is that the mandate could violate the civil rights of men because it requires women to be promoted and others to be disqualified on the basis of gender.[10] In my opinion, that is nonsense; nothing in such laws says that existing male board members must be replaced. There is natural board turnover, for one thing, and boards can also be enlarged by one or two in order to accommodate the laws.

The New York Times article and other writings on board diversity, urge us to rely on investors to send the signal to companies, noting that BlackRock and other investors are already working on that. News flash: Investors have been working on sending that message for years — in our case, decades. CalPERS and CalSTRS launched their Diverse Director DataSource, a tool for recruiting diverse directors, in 2011 — and that wasn’t the first time that a pension plan tried to move that particular needle. The treasurer of the Connecticut state pension plan has been working to make boards more diverse since the early 2000s.

We at Pax World Funds have been voting against all-male boards for more than two decades and writing letters to each and every company where we do this telling them why.

There was a superb article on Corporate Counsel’s website earlier this year that talked about racial diversity at law firms, noting, “We split atoms, we have placed men on the moon, we travel at the speed of sound, yet we cannot figure out the ultra-complex issue of law firm diversity.”[11] That’s exactly the right way to frame it: If we really care about this, we should be able to make it happen. It’s not rocket surgery.

This is why we have mandates. Reasonable people get tired of waiting for appropriate, well-supported things to happen. If you don’t want mandates, then gender diversity has to be more than a talking point: We need companies to set aspirational targets, make the appropriate people accountable for meeting them, and report on progress publicly. That is what makes things happen.

Article by Julie Gorte, Ph.D., Senior Vice President for Sustainable Investing, at Impax Asset Management LLC and Pax World Funds. She oversees environmental, social and governance-related research on prospective and current investments as well as the firm’s shareholder engagement and public policy advocacy. Julie is also a member of the Impax Gender Analytics team.

Julie serves on the boards of the Endangered Species Coalition, E4theFuture, Clean Production Action, Great Bay Stewards and is the board chair of the Sustainable Investments Institute. She also serves on the Investment Committee of the United Nations Environment Programme Finance Initiative.

Prior to joining Pax, Julie served as Vice President and Chief Social Investment Strategist at Calvert. Her experience before she joined the investment world in 1999 includes nearly 14 years as Senior Associate and Project Director at the Congressional Office of Technology Assessment, Vice President for Economic and Environmental Research at The Wilderness Society, Program Manager for Technology Programs in the Environmental Protection Agency’s policy office and Senior Associate at the Northeast-Midwest Institute. She received her Bachelor of Science in Forest Management at Northern Arizona University and a Master of Science and Ph.D. from Michigan State in resource economics.

Article Notes:
[1] 2001 Catalyst Census of Women Board Directors,” Catalyst, 2001 https://www.catalyst.org/wp-content/uploads/2019/02/2001_Catalyst_Census_Women_Board_of_Directors.pdf

[2] In 2011, the percentage of women on boards of the Fortune 500 was 16 percent, per “2011 Catalyst Census: Fortune 500 Women Board Directors,” Catalyst. Dec 13, 2011. https://www.catalyst.org/research/2011-catalyst-census-fortune-500-women-board-directors

[3] “2016 Catalyst Census: Women and Men Board Directors.” Catalyst. 2017. https://www.catalyst.org/wp-content/uploads/2019/02/census_2017.pdf

[4] Ernst & Young, “Governance trends at Russell 2000 companies,” October 2016. https://www.ey.com/Publication/vwLUAssets/EY-governance-trends-at-russell-2000-companies/%24FILE/EY-cbm-russell-2000-governance-trends.pdf

[5] Gorte, Julie. “The Investment Case for Gender Equality,” Jan. 29, 2018.

[6] See, for example, Julie Gorte, “The Investment Case for Gender Equality,” Pax World Funds, January 29, 2018. https://paxworld.com/the-investment-case-for-gender-equality-new/

[7] Andrew Ross Sorkin, “Diversify the Boardroom, Just Not Like California,” The New York Times, Oct. 1, 2018. https://www.nytimes.com/2018/10/01/business/dealbook/women-corporate-boards-california.html

[8] Michael R. Bloomberg, “Obama Didn’t Kill Coal, the Market Did,” Bloomberg, August 4, 2015. https://www.bloomberg.com/opinion/articles/2015-08-04/obama-didn-t-kill-coal-the-market-did

[9] Meggin Thwing Eastman, Damion Rallis, Gaia Mazzucchelli, “The Tipping Point: Women on Boards and Financial Performance,” MSCI, December 2016. https://www.msci.com/www/research-paper/the-tipping-point-women-on/0538947986

[10] David A. Katz and Laura A. McIntosh, “Gender Diversity and Board Quotas,” Harvard Law School Forum on Corporate Governance and Financial Regulation, July 27, 2018. https://corpgov.law.harvard.edu/2018/07/27/gender-diversity-and-board-quotas/

[11] Don Prophete, “A Black Partner Responds to CGs on Law Firm Diversity,” January 30, 2019. https://www.law.com/corpcounsel/2019/01/30/a-black-partner-responds-to-gcs-on-law-firm-diversity/?kw=A%20Black%20Partner%20Responds%20to%20GCs%20on%20Law%20Firm%20Diversity&et=editorial&bu=CorporateCounsel&cn=20190130&src=EMC-Email&pt=BreakingNews

This will be my fifth year contributing to this GreenMoney issue dedicated to Women and Investing. In the past I have discussed studies showing that women are good, that is, above average, investors; I have discussed my discomfort with making gender the only lens through which people make investment decisions, but I have not discussed the process by which a firm, like the two I am involved with, makes the move from minority female to majority female. Nor have I discussed one woman who was particularly important to my own advancement.

Domini Impact Investments has five employee equity-owning managers in leadership. Four of the five are female. The Sustainability Group has four partner-level members and three of the four are female. I feel pretty secure in stating that female leadership is possible, even within the financial asset management field.

When I asked the CEO of Tucker Anthony & RL Day to allow me to try to pass the exam necessary to earn a license that would allow me to be involved with the sales of securities in 1974, it was not totally unheard of. After all, plenty of men had secretaries who held the license. That way business could be conducted on behalf of some guy while he enjoyed a game of golf. It was unusual, however, upon passing the exam, to have been given a seat selling.

It took me a while to realize that I was the only female in the firm with a full-time sales job. But the times they were changing. I was the unknowing beneficiary of a movement that was powerful and sophisticated.[1] I’d like to say it was enlightened management, but it was the power of people being allowed to file a class action lawsuit. Dating back to the late 1960s women had been trying to break into real jobs on Wall Street. It wasn’t happening. But when a lawsuit was filed, disclosures were available to the press. One damning statistic made public was that as of May 1973 nearly 97 percent of Merrill Lynch’s 5,197 account executives were white males. Another was the fact that the hiring questionnaire asked, “When you meet a woman, what interests you most about her.”

Here, the most points were awarded if the candidate answered that it was her beauty, and the fewest if he answered that it was her intelligence. The company countered criticism and stated that the testing was fair, but eventually it settled and set in place gender diversity initiatives. My timing had been good; Tucker Anthony did not want the sort of headlines Merrill Lynch had suffered.

I had been a professional for years before the backdrop of my promotion became known to me, but I was just starting to become fascinated with the concept that you might not need to buy companies that made awful products or behaved in nasty ways. I was just learning about the few other people who felt that way, too. The one who most certainly turned my life on its head was a woman named Joan Bavaria.

Joan ran a small investment advisory firm called Franklin Research & Development (now Trillium Asset Management). She’d gotten the job the old-fashioned way, by marrying the boss, but that didn’t for a moment make her less than a powerful force for good in the field. She mentored me and introduced me to everyone she knew who was remotely involved with the intersection of money and finance. Joan Bavaria pulled together a group of people who, each in their own way, used money to create social change. That group eventually became US SIF: The Forum for Sustainable and Responsible Investment.

Through Joan’s network many alliances grew. Investors met faith groups who worked with the Interfaith Center on Corporate Responsibility. We wanted to support their work, which was to file shareholder resolutions with companies as a lever to bring the companies into solutions. The network also included participants in enterprises that were in the business of alleviating poverty. These were low-income credit unions, community development banks, and even non-profits created to make loans.

Eventually the three legs to the stool, as Joan called it, became the core framework to the field of responsible investing. Leg one, buy positively to create a demand from Wall Street for responsible corporate behavior; companies that made ergonomic furniture, not bombs, for instance. Leg two, engage with companies, government, non-profits and others to build coalitions that would engage to get something done; we joined together to keep the disgraceful governance of South Africa, which denied the Black majority a vote, in the headlines. Leg three, seek out and support non-traditional financial intermediaries with the mission of economic justice – because healthy economics include the least among us. We allocated investor dollars to debt instruments these grass-root defenders offered and shifted our corporate accounts to community development banks. Joan always pointed out that the removal of a leg would cause the stool to fall and that as a group we must commit to support all three equally.

Joan’s earliest clients were largely female. She was often sought out as a person who understood that just because you didn’t really make a study of investing, it didn’t mean that you were someone to talk down to or “take care of.” Like me, she had started with a conventional firm and had broken through the unstated barriers for women while there. I dedicated my first book, co-authored with Peter Kinder, Ethical Investing, to her. When she withdrew from the world to nurse her cancer, the cancer that eventually killed her, the world lost a powerful advocate.

Since then, I have found that professionally I do have a bit of an advantage in winning a female client or working with a female colleague. Perhaps it is as simple as the shared background. But there is an element of passing it on. Joan did it for me, and I want to do it for you. On the client side, there are clear messages. For instance, I once brought in a new client who resentfully told me that her former advisor treated her like a child. When I phoned him to make the friendly ‘no hard feelings’ call, he was a gentleman. He was a gentleman with advice. “In some ways she is really just a child. You have to guide her or she’ll make mistakes,” he told me. So many clients have such stories. It isn’t 1973 anymore, but attitudes take generations to truly subside.

Much as I enjoy managing assets for women, it is the female work-partners that I feel the strongest connection with. We seem to have the same assumptions. While we sometimes make appointments to catch up, we generally catch up several times a week without appointments. We all volunteer to write the first draft, to take on the tough phone call, to dig through the files for the key data point. Yes, I chose my partners sensing that they had these qualities, but we re-enforce them with our interaction. And it has led to long-term relationships.

Carole Liable, CEO at Domini Impact Investments has worked alongside me since before there was a Domini (she was originally with a vendor to the funds), and in the over twenty years we worked together we have gone through years when she worked four very long days so as to be home the fifth; we have built a workforce that largely reflects the population at large; we have gone through the worst of times and survived.

Wendy Holding, my most senior partner in the Sustainability Group has held the group afloat for fifteen years and, for some years now, has surpassed me in client volume, firm growth, and outreach to the various communities in the field. As a division in a smaller firm, we have also built a team (partners and specialists) that reflects the population at large, but is majority female leadership.

Over my career I have reached out to women, many of whom are now my fiercest competitors, and most loyal defenders. Julie Goodrich, founder of NorthStar Asset Management, and I together taught Ethical Investing classes. Patricia Farrar-Rivas, CEO of Veris Wealth Partners and Kathy Leonard, founder of the Leonard-McDevitte Sustainable Investment Group at UBS went on retreats together with me (yes men were invited too) to address barriers to our field and to evaluate solutions. Julie Eades, past President of New Hampshire Community Development Loan Fund was in the room with me as we drafted guidelines to create the predecessor to what is today Opportunities Finance Network. Listing names is not the point. The point is that it is clear to me that each of these women has tried to be deliberate in finding and promoting women in the field of finance, just as I was, and just as Joan was. What began as a slender silken thread has become a woven fabric. The African proverb reminds me of my female colleagues, “when spiderwebs unite, they can tie up the lion.”

Article by Amy Domini, Founder and Chair of Domini Impact Investments (https://www.domini.com). She is widely recognized as the leading voice for socially responsible investing. In 2005, Time magazine named her to the Time 100 list of the world’s most influential people. In 2006, she was awarded an honorary Doctor of Business Administration degree from Northeastern University College of Law. Yale University’s Berkeley Divinity School presented Ms. Domini with an honorary doctorate in 2007. In 2008, Ms. Domini was named to Directorship magazine’s Directorship 100, the magazine’s listing of the most influential people on corporate governance and in the boardroom.

Ms. Domini is a past board member of the Church Pension Fund of the Episcopal Church in America; the National Association of Community Development Loan Funds, an organization whose members work to create funds for grassroots economic development loans; and the Interfaith Center on Corporate Responsibility, the major sponsor of shareholder actions. She is a member of the Boston Security Analysts Society. She has been a frequent guest commentator on CNBC’s Talking Stocks and various other radio and television shows.

Ms. Domini holds a B.A. in international and comparative studies from Boston University, and holds the Chartered Financial Analyst designation.

Publications: Ms. Domini is the author of Socially Responsible Investing: Making a Difference and Making Money (Dearborn Trade, 2001) and The Challenges of Wealth (Dow Jones Irwin, 1988), and a coauthor of Investing for Good (Harper Collins, 1993), The Social Investment Almanac (Henry Holt, 1992), and Ethical Investing (Addison-Wesley, 1984).

Article Note:

[1] https://books.google.com/books?id=LPgb5DbeOs0C&pg=PA50&lpg=PA50&dq=%221973%22+merrill+lynch+suit+female+discrimination&source=bl&ots=Ci_SQHve8E&sig=ACfU3U0HeFOCRFB2kig8v0rRCWdmPdIJcg&hl=en&sa=X&ved=2ahUKEwiQ1fG_mungAhULMt8KHW6NCH0Q6AEwCnoECAYQAQ#v=onepage&q=%221973%22%20merrill%20lynch%20suit%20female%20discrimination&f=false