How to Invest in Gender Diversity

Holly Black: Welcome to the Morningstar Series "Ask the Expert". I'm Holly Black with me is David Barron. He's Head of Equity Index at L&G. Hello.

David Barron: Hello.

Black: So, we're talking all things ESG. And I think one of the most exciting things about ESG investing now is you can really tap into so many different themes. So, what are some of the key trends you're looking at, at the moment?

Barron: Yeah, absolutely. I mean, definitely many themes. I mean, the big ones, the highlights are definitely climate change. And then, social diversity, diversity in general, and some governance themes as well. But those are kind of the big, overarching themes that we're seeing.

Black: And you have one fund in particular that taps into gender diversity.

Barron: We do absolutely, yeah, an exciting fund. We've had over a year now in track record it was a very, you know, multiple teams at Legal & General focused on building this product. And the idea is, to create a gender diversity score effectively, and then tilt away from market cap towards companies that have a positive gender diversity score, and away from some of those who need to improve a little bit. So, it's an exciting journey and doing exactly what we thought it would do.

Black: So, put simply, you're looking for companies that have more women in management and on the board, and avoiding those where it's just loads of men.

Barron: Effectively yes. So, four metrics that drive it. So, board level, executive level management level, and then workforce level. So we bring all the kind of the raw data from companies in, assess their kind of gender diversity balance, and then like you said, and tilt away from the ones that are that are more homogenous, many men on the board and towards some that are, moving towards this kind of transition that we're seeing in the industries. So yeah, it's an exciting product, lots of fundamental research that backs why you might want a more diverse company from a performance perspective.

So, it's kind of hingeing on that concept, and then also trying to incentivise some of the change. So, when you look at the data today, it's very skewed. Men heavy especially in certain industries. And so, you know, trying to kind of incentivise some of this change, and then engage with companies and kind of talk to them about their scores and how they could score better is kind of the thesis of the fund.

Black: But why does having more women on the board lead to better investment returns for me?

Barron: It's a great question. I mean the reason – one of the things, the research there is all about, you know, more diverse companies in general have shown better corporate results. And so there is some independent research that verifies that and so we're just trying to bring that concept into, a fund that actually can bring some of those views to bear. So, it's all about trying to link that historical research. And I think when we look at data, the gender diversity stats are what's available, you know, the research is all about just general firm diversity and this fund, is kind of grabbing what the the available metrics are that, that companies are reporting on effectively.

Black: Why are companies starting to take this more seriously, because lots of signed up to say the Women in Finance Charter or the 30% Club. And it seems even just a few years ago, this wasn't really on many people's radars.

Barron: Yeah, no, it's a great question. I think part of that is definitely the push, part of that's the research. I mean, I do think you know, from personal experience, you see the benefits of having a team challenge kind of status quo and bring different concepts in. And so, it's all about benefiting from that trend, bringing people into an organization that are going to challenge what you're doing and hopefully drive good product.

Black: What are couple of examples of companies in the fund that do have good diversity scores?

Barron: Yeah. So, I think it's interesting, you see a lot of industries that are pretty strong. So, some of the consumer staple companies are pretty I would say positive performance companies that get some tilt. So, Unilever is one that does quite well, Legal & General is at least a positive tilt.

Black: You have to say that.

Barron: I had to say that. But obviously there are things that we can improve on as well internally. You know, I think that's definitely industry dependent, you know, some of the energy industries, utilities, things like that. Finance tends to be more and more male dominated. So, you see a little bit of underweight into some of those, those kind of larger financial companies and energy companies.

Black: Super. Well, thank you so much for your time.

Barron: Thank you.

Black: And thanks for joining us.