Leverage Point
Shifting Institutions
How are we making progress on shifting large institutions, who collectively control trillions in capital, to integrate gender strategies?
The last two years have seen a shift towards mainstream awareness of gender-smart investing.
Many people are finding that they no longer have to contextualise or explain gender finance in the same way, with public and private institutions already keen to introduce gender strategies (although there is some doubt that awareness is as high amongst retail investors). While investing in women has historically been put in the ‘philanthropy’ bucket, some institutions are beginning to see it an opportunity for alpha.
With public sentiment shifting in favour of socially and environmentally responsible businesses, institutional investors have also begun to recognise the need to balance societal and fiduciary responsibilities. This has gone hand in hand with a new willingness to delve deeper into the nature of fiduciary duty and what it might encompass beyond making financial returns.
At present, though, gender is still not an investment priority, and a sophisticated approach to investing with a gender lens is not well understood. Even for those funds focused on impact, sustainability is still the dominant theme. However, most respondents are optimistic that we will see significant progress within the next five-to-ten years.
“Activity and awareness are at an all time high. There are so many funds and entities that are claiming to do gender lens investment. How well are they doing it? The jury’s still out.”
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“We’ve definitely seen people pick up on the gender lens investing and gender equality debate. It’s the same as with climate finance and impact investing: there was a moment where the discussion flipped to: “Okay, we get it. How do we do this?”
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“We used to have this very abstract concept of fiduciary duty – that it was only about making returns and that is going to be the same for everyone. And I think one of the things that’s happened [is that pension funds] have started asking: who are the people we have fiduciary duty over? I don’t think they were doing that before.”
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“Now 66% [of our client base] is trying to do something in the way of ESG. And a third of those are focused on gender, which might sound small, but that’s triple what it used to be even three years ago”
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GenderSmart View
I’m seeing more leading-edge organisations recognising that gender-smart investing can be done from more pools of capital, in more places, within their own organisations. For example a foundation that used to view gender lens investing as the basis of programme-related investment (PRI), and is now also doing mission-related investment from their endowment. Or a bank that once siloed gender in one part of the organisation and is now working to integrate it throughout.
Suzanne Biegel, Co-Founder
Shifts and Signals
January 2020
Goldman Sachs, Nasdaq, and others have declared they won’t take companies public that have all-male boards.
June 2021
Verve Super, an Australian pension fund, introduced a gender index for superannuation investments.
June 2021
The 2X Challenge, founded by the Development Finance Institutions of the G7 nations, announced that it would deploy or mobilise $15 billion for gender-lens investment, after surpassing its original target of $3 billion by over 100%.
October 2021
Morgan Stanley, Bank of America, UBS, Goldman Sachs, and a number of other financial institutions have recently dedicated programmes to back women-led (and especially women of colour-led) funds and firms.
March 2022
Bloomberg announced the EU Women in Finance initiative to inspire women across the EU to take up leadership roles in global finance institutions, and introduced an expanded diversity index.
May 2022
The Luxembourg Stock Exchange partnered with UN Women to commit to promoting gender-focused investments on their exchange.
July 2022
The Hong Kong Stock Exchange introduced a ruling that any company seeking to list in Hong Kong to have at least one director of a different gender to the board majority. The exchange has also set a 3-year deadline for every listed company, new or old, to ensure gender diversity on its board.
August 2022
Visa announced a grant towards the African Women Impact Fund (AWIF), a collaboration between Standard Bank and the United Nations Economic Commission for Africa (UNECA), to fund the working capital needs of women fund managers across South, East and West Africa.
GenderSmart View
In the sustainable investing context, it is encouraging to see the sea change of disclosure and reporting requirements (albeit quite varied in a global context) that is calling for greater transparency and rigour, alongside the development of more aligned standards and measurement frameworks. Now it is imperative for gender finance leaders to be at those tables where these standards are being developed and refined to ensure a gender and broader diversity lens is well integrated, to support the attainment of deeper gender outcomes.
Sana Kapadia
Head of Content
Institutional capital isn’t shifting at scale
While it’s clear that progress has been made in terms of awareness, the overall flow of capital into gender lens investing is still closer to a trickle than a flood. As one example, female founders raised just 2% of all venture capital in 2021, which marked a $1 billion decrease from 2019. And while the overall number of investments increased in 2022, the percentage of capital did not.
In part, this can be attributed to structural upheaval within institutions as they look to establish new parameters around where and how they should be investing. Restrictions around investment allocations from established funds mean that only a small percentage of assets are free to be invested with a thematic lens. And gender is still considered a thematic lens rather than a core part of investment analysis.
From a lack of product diversification to the unwillingness of institutional investors to back more innovative instruments, there are a number of factors preventing the flow of institutional capital. Much of the innovation is happening in earlier stage financing, which has captured less institutional capital. For this to change, it will require allocators to adopt a more flexible mindset and consider products that meet the actual needs on the ground – even if they don’t conform to their usual expectations.
“In impact investing there was a lot of talk before there was a lot of capital - now the capital is shifting and the narrative is moving to being cautious about impact washing. In GLI we are at peak conversation and we have data suggesting that we will be moving to peak allocation.”
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“You’re going through a period of structural upheaval that tends to encourage prejudice, but also creates confusion amongst organisations about where they should be investing, where they should be growing, and so on. So that’s going to be the complication.”
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“[We need to see] a more diverse range of gender finance products which go beyond box checking – actually putting money towards a range of solutions which might not look like a typical venture capital or private equity fund. Similarly, more nuanced products which are specifically tailored to meet the needs of those on the ground, which may then not conform to a conventional asset allocator’s vision of what an investment product should look like.”
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“What will it take for institutional capital to move? The answer is product. And the quality of product that we are building is the key system block right now. Differentiations between products are so narrow – it’s women on boards, women in the C suite. Until we can get to more sophisticated data, people don’t have any incentive to build different or better products.”
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“There is still, to a certain extent, a perception that impact investing with a gender lens was born out of microcredit in emerging markets, and is composed primarily of small scale products that might not be relevant for institutional scale investors.”
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“DFIs and multilateral development banks could be doing much better at thinking about credit risk enhancements to crowd in more institutional capital. For example, utilising tools like loan portfolio guarantees, subordinated capital and Grant TA financing, as well as figuring out ways to partner with other philanthropic entities willing to provide first loss capital.”
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Investors still (mis)associate gender finance with poor returns
A significant proportion of investors still link sustainability and impact with compromising returns, when it can be a very mainstream commercial approach to investing. Until sustainable, responsible, and impact investment - and gender and diversity lenses in particular – are seen as best practice for high-performing investors, accessing capital at scale and speed is likely to be a challenge. In the interim, there is a need for intentionality in boosting capital flows, and clarity when something has a different returns profile - or doesn’t.
“We really need to get away from this idea that when you apply ESG you no longer care about performance, because the reality is the majority of the assets in the world care about compounding and growing, and by growing, they compound more and have more potential to create impact. So we need the assets to keep growing. And so you need to be in a really disciplined way reporting against traditional benchmarks and understanding where there’s deviation from those and why, and are you comfortable with that deviation for appropriate reasons.”
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“The core of this [GLI] getting into the financial sector space is that you need to essentially put a price on it and show that it’s a risk. That’s why climate action has been so successful because you have the issue of stranded assets: it’s a risk to hold on to fossil fuel assets because it’s actually bad for your balance sheet. So, there should be a similar approach [for gender and diversity] but it’s hard because we can’t really put a price on it. ”
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“DFIs need to take more risk. [Currently] they are more focused on return than impact and this is something that has become an issue. When you’re investing in a risky market, and if you want to make that market sustainable for the next generation, you need to put skin in the game”
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“Gender considerations by investors are often seen to be primarily in the social impact category, and they’re not really seen as being a critical element of investment performance or business strategy. So this means that while they tend to find solutions for female issues, they are not viewing women as solutions to social, economic and political challenges.”
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Gender finance is moving from siloed to integrated
With an increased awareness and interest in gender finance comes an effort on the part of institutions to fit it into their existing ESG, sustainable or thematic investing, or impact investing efforts.
Some gender finance actors are keen to ensure that gender strategies are integrated within each of the three ESG themes, rather than swept under the social category, in order to unlock more capital globally. Others believe that positioning gender-smart strategies as part of ESG isn’t sufficient to address capital gaps or recognise market opportunities to invest in women fund managers, founders, and businesses with positive impact for women.
In order for real progress to be made, several respondents believe gender finance needs to stop being seen as another requirement in a long list of investment criteria, and embedded into investment practice across vehicles and firms, whether or not they have a sustainability or impact focus. To do that, we need clear metrics, process standards, and examples. This would remove ambiguity, support the identification and creation of suitable products, and tap into larger pools of capital across emerging and developed markets.
“What I’m seeing is the focus of investors in participating in the financing of projects or companies that do fill their ESG criteria. For example, AFOREs [pension funds in Mexico] manage more than $250 billion. And in the G part, and the S part, they’re looking at the diversity within teams and within companies. So companies that they’re looking at financing in, for example, a plain vanilla bond, they now want to change into a linked bond or green bond.”
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“If we keep talking about gender only through themed investors like DFIs then we put brackets around what gender lens investing is supposed to look like. And, for it to be mainstream, it should be capitalised and adopted and driven also by private investors.”
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“We were struggling to really bring content to the S of ESG. And now we’re looking at the value chain of the companies we are financing. So I think that’s a trend, that normal commercial banks and companies have a much more impact- and purpose-driven approach, and see this as a business case”
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“There’s still so little money in impact, relative to the overall private equity and debt markets. Integrating gender into non-impact funds would tap into much larger pools of capital that we could influence and help to integrate gender into funds. Especially in the developed markets, it would also [allow us to reach] larger pools of capital.”
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““It’s really about building markets. Gender is not part of how people do their work and allocate the capital. Rating agencies don’t understand or don’t value a lot of the impact pieces that we incorporate, so you have to educate them. Regulators don’t look at the work, either. ”