Investors will start to say: us, too
When celebrated investor Bill Gross said that 'bonds, like men, are in a bear market,' he was on to more than he might have realised.
In his investor note in January, the Pimco co-founder, now at Janus Henderson, used the #MeToo movement as a 'light-hearted' introduction to tie into his main, serious point — about where bond yields and returns were heading.
He said he was "with Oprah for president" but stated men had positive qualities too: "Men always know where the remote control is. Right next to them."
But while the passion and rage of the #MeToo movement may seem far-removed from the flows of money around global markets, it is going to have its impact there too.
Asset managers will inevitably take into account companies’ gender policies more and more, driven by clients, employees and economic rationale.
The focus on sexual abuse, harassment and discrimination over the past year has exposed not just the scale of injustice faced by women but also a gaping cultural divide.
And this is most visible in the largest economy and biggest market in the world, the US.
Investment firms may believe they will stay above the fray. But they will not. Their investment decisions will also come to shout out #MeToo, pushed on by their clients and employees.
This broad shift will arrive, and already is arriving, through numerous routes.
At the thin but sharp end of the wedge, dedicated responsible investors will look specifically at investing in companies with a strong performance on gender equality.
In 2017, $910m of assets invested in public market securities were in so-called “gender lens” strategies, according to Veris Wealth Partners, a wealth management firm. That's a tiny number relative to global markets, but it's bound to grow.
Others with far more clout will focus on engagement, either soft or hard. The pension fund CalPERS has tweaked its corporate governance principles, telling each public company board to “develop and disclose its efforts towards establishing effective corporate culture, including its anti-harassment policy”.
And activist investment firm Arjuna Capital has pushed firms including Apple, Intel and Amazon on gender pay equity.
Other investors will look to screen out companies with particularly bad policies on harassment, diversity or pay.
Passive investing will also find a role. The Lyxor Gender Equality ETF now allows investors to take exposure to equity of big, well-traded companies with high standards on gender equality.
And institutions are starting to issue gender-themed bonds, with proceeds going towards the bonds of companies performing well on gender, projects leading to gender equality, or small businesses owned by women.
As with green bonds, the impact of such deals is not so much in the immediate use of funds but in the buzz generated around them.
However worthwhile or profitable you think these initiatives are, they will flourish in the coming years, for three main reasons.
Asset managers are increasingly focusing on what the next generation is looking to do with its money. And they are discovering that values will play a more prominent role.
According to research by US Trust, 87% of US high net worth (HNW) investors in the millennial age group think a company’s environmental, social, political and governance track record is important to the decision about whether to invest in it.
This compares to 39% in the silent generation, the oldest one surveyed, and 53% overall. Women also score more highly for this concern than men.
Seven in 10 of HNW millennials also see gender diversity in leadership positions as a competitive advantage for firms, versus 51% overall.
It is research like this that suggests pushing for more female representation on boards helps investors from a marketing point of view.
“The vast majority of customers — those who are progressive/left wing, centre and centre right — will support it and crucially investors will be positioning well with younger customers and female clients,” said Raj Thamotheram, founder and chair of Preventable Surprises, which calls itself a “think-do” tank aiming to prevent or mitigate corporate and market implosions.
“Even if some vocal far-right voters in the USA object, they are hardly likely to burn their investment papers, and in any case, managers do not need to engage in provocative PR,” he added.
State involvement in investment funds will also spur action.
“Given that the Californian Governor has asked the mega pension funds CalPERS and CalSTRS to do more on climate change, it will not be long before the same happens with gender — which both funds have been doing for some time,” said Thamotheram.
“When these mega funds choose to really push this change down their investment supply chain, this will have national and global knock on effects,” he added.
A further shove will come from employees in investment firms. Their world views will shape the firm’s activity.
Take the green finance drive in Europe: investors, institutions and intermediaries see obvious commercial benefits from getting involved, both from a pure financial perspective and from the reputational gains to be reaped.
But it's not all pure rational corporate self-interest. Plenty of professionals who work in these markets are also personally invested in the idea of green finance, and therefore more receptive to new ideas.
Climate change has become a mainstream concern among educated people who are internationally-minded — a demographic disproportionately represented in employees of the finance sector. It is therefore unsurprising that green enthusiasm in finance contrasts with governmental inertia on the matter.
The culture war over gender pits social conservatives, who are more likely to be older and male, against progressives, who skew female and younger.
The asset management industry is gradually going to replace its mostly male retirees with younger more diverse graduates, in part because it faces the same pressures to do so as the corporates it owns. This creates a pool of people more open to investing with a gender lens.
Asset managers will also look at evidence showing that boards with more gender balance perform better.
McKinsey found earlier this year that “gender diversity is correlated with both profitability and value creation”.
The view is not unanimous. Katherine Klein, professor of management at Wharton, the business school of the University of Pennsylvania, wrote up some findings last May after examining academic research. She found little to no relationship between board gender diversity and board performance.
“Women should be appointed to boards for reasons of gender equality, but not because gender diversity on boards leads to improvements in company performance,” she said.
Nevertheless, the idea that different world views improve performance, advocated by the likes of Mohamed El-Erian, chief economic advisor at Allianz, seems like common-sense, and it sticks.
According to EdenTree, a responsible investor that engages with FTSE 250 companies with all-male boards, encouraging boardroom diversity “will lead to improved company performance in the long term”.
Equally, companies that fail to make progress may face increased regulatory and reputational damage.
“In contrast to past eras, when it was difficult for activists to gain traction with companies on social issues, and companies were able to exclude or ignore these proposals without public backlash, the cultural context of the current #MeToo movement makes that approach risky and potentially damaging to the company,” said David Katz and Laura McIntosh of law firm Wachtell, Lipton, Rosen & Katz, in a recent article on the Harvard Law School Website.
California has recently legislated to make sure that one woman is on every public company board headquartered in the state from 2019, and from 2021 almost parity will be expected.
Investors will look to price in risks on these matters in advance of them creating damage to their holdings.
So for these three reasons, Gross's joke was on the money when it comes to investing. Luckily for him, Janus Henderson Group has three women on its 11 person board.