Can gender diversity lead to better returns?

Investing in gender diversity in the workplace can actually increase a company’s — and your portfolio’s — bottom line, says a New York-based portfolio manager. 

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“We believe these companies benefit from an improved culture where employees are motivated and enabled to grow and contribute within an organization,” said Jason Smith, managing director and portfolio manager at Rothschild Asset Management.

There is also empirical evidence that shows better earnings growth and higher profitability for companies with more diverse boards, Smith said, “supporting the theory that diversity matters.”

“These corporations also benefit from improved collective intelligence due to better balance of perspective, mindset and experience, leading to better decision making,” he added.

A recent review of U.S. and Canadian banks by Moody’s Investors Service found that more diverse firms tend to have higher credit ratings, though the rating agency stopped short of concluding that there’s a direct link.

Rothschild’s gender diversity strategy seeks to invest in companies that “support gender diversity in the boardroom, across senior management and through their corporate policies,” Smith said.

Companies also need to exhibit other fundamental attributes for them to be considered attractive investments, Smith said, such as being attractively valued.

Analysts will compare a company to its closest competitors, Smith said, and then examine both the financial and non-financial influences on earnings. In addition, analysts examine gender diversity and equality by evaluating a company’s sustainability, diversity and inclusion reports.

Value is also placed on factors such as training programs, equal pay initiatives, transparency, and corporate policies around diversity, Smith said. Risk factors are also analyzed to ensure the risk-reward tradeoff is favourable.

“We assess value by considering not just pure, relative and absolute information, but also by analyzing valuation in the context of a company’s cash generating potential, ability to meet investor expectations, quality of balance sheet, competitive positioning, volatility of earnings, and vulnerability to critical ESG factors, such as poor governance,” Smith said. 

Two examples of stocks that Smith likes for this strategy are Detroit automaker General Motors and Trane Technologies plc., an American Irish-domiciled industrial manufacturing company.

General Motors’ board is more than 50% women, Smith said, alongside a female CEO, and its gender pay gap is 3% or less at all levels of the company, with a published strategy to close the gap. 

Trane Technologies also scores “extraordinarily well” on the gender front, Smith said, with women representing 42% of the board and 25% of employees globally. The company was one of the first to join the CEO Action for Diversity and Inclusion, and the first in the HVAC industry to enter the Paradigm for Parity coalition, a pledge to bring gender parity to the corporate leadership structure by 2030.

“It’s really combining the strong fundamentals in our view with a top-tier gender score — that’s what it takes to get a name into the portfolio,” said Smith.

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