Pension Pioneers: Integrating a Gender Lens Beyond Board Diversity
Pension funds represent one of the largest and most influential pools of capital in the world, with assets exceeding $USD35T at the end of 2020. Yet in spite of the $2.9B allocation by Japan’s GPIF in the Morningstar Gender Equality index in late 2020, and increased uptake of ESG principles by pension funds across the board, there are relatively few funds applying an intentional gender lens to their investments beyond board diversity. We assess the opportunities and challenges for pensions in key global markets, and speak to a few early movers tapping into a broader spectrum of opportunity.
Driving the G in ESG
Through the lens of board diversity, several significant pension funds could be considered gender lens investors. As of 2020, U.S. pension funds managed over $3 trillion of total assets incorporating ESG principles, and among all institutional investors $2.28T dealt with ‘board issues’, where gender most commonly shows up.
One reason commonly cited for the lack of GLI beyond board diversity is the challenge of measurement and implementation at scale - particularly in the wake of tougher climate reporting requirements, which increase the burden on funds and investee companies alike. Environmental factors, as with governance, are easier to measure than social risks, and what gets measured gets managed. In addition, some institutional allocators can´t invest outside explicit mandates - for example, apply a gender lens in a climate fund. Restrictions may be real or perceived. But whether perception or reality, if allocators don’t believe that they should or can allocate this way, it is a barrier.
In spite of this, there are encouraging signs from pension funds integrating gender, and other facets of diversity, at a deeper level - whether through careful stewardship of investee companies, or direct investment in a mandated fund or infrastructure project.
Going Deeper on Equity and Diversity
The ILN is taking steps to work with its membership, and focus on advancing the ‘S’ in ESG, bringing more nuance to their metrics and better engaging with investee companies on all facets of inclusion. They are clear about the consequences: “If investors fail to elevate social metrics to the maturity of environmental metrics, investment firms and our portfolio companies will be left vulnerable to important risks.”
“Since we have a lot of data, and we put that together, we try to find signals to do with diversity. For example, we can prove through historical data that companies with more women employed have returned better over time”
Illinois State Treasury is one investor with a comprehensive commitment to gender equity and social justice, which comes to life in their portfolio (including $15B under management in college and savings plans). According to former CIO and Deputy State Treasurer Rodrigo Garcia, the most catalytic strand of this is their VC program, which has invested $121.5M into minority and women-owned funds to date, and 40% of the committed capital from the Illinois Growth and Innovation Fund are to diverse fund managers. The treasury also helped seed the first Latina VC firm in Illinois - Chingona Ventures - which invests in Latina entrepreneurs. “If we’re looking for the same pedigree, the same experience, and the same skill set in an ecosystem that’s already significantly dilapidated and significantly underrepresented when it comes to women and people of colour’, Rodrigo says, “of course you’re going to continue to see those same issues. It’s about changing the paradigm and changing the types of things we are looking for in order to determine success.”
In Sweden, AP2 ($40B in assets) participated in the WEOF (Women Entrepreneurs Opportunity Fund) with Goldman Sachs, IFC, and FMO. The facility launched in 2014 and was the first to promote access to finance for women-owned SMEs (WSMEs) through financial institutions. Today, they don’t have specific gender lens investing examples beyond this one, but they try to integrate gender and diversity - one of their four focus areas - into the evaluation of all possible investments. “At least half the portfolio is managed through quantitative strategies. And quantitative strategy is built upon research or signals that have historically shown good performance. Since we have a lot of data, and we put that together, we try to find signals to do with diversity. For example, we can prove through historical data that companies with more women employed have returned better over time,” says Eva Halvarsson, CEO.
Nudging and Nurturing
“If we look at our unlisted assets, like private equity, real estate, forestry or agriculture, we are larger owners and can drive this issue on gender”, Halvarsson says. Their due diligence process has a section on diversity, data from which is then compiled and anonymised to encourage action in their PE managers. “Even though we're not sharing who's who, we can point out that their competition is scoring better. It's one way to nudge them into working with these issues.”
“CDPQ recognise the importance of proving the diversity dividend, and seek to prove outperformance rather than no downside from their investments. It’s also critical to ensure the governance and leadership structure of the fund mirrors their diversity targets and definition.”
In South Africa, PIC (the asset manager arm of Africa’s largest pension fund GEPF) launched an incubation program for private markets fund managers which - while it led with a racial and ethnic equity lens - also incorporated strict gender targets. It then worked with investees to meet these targets, recognising that not a lot of existing managers fit the original mandate. “So beyond race, you had to have 30% female ownership’, says Marde Van Wyk, a private markets consultant who recently left the asset manager. “And if you don't have the minimum 30%, there's a transitional period of three years to get there which has to be contracted upfront.”
Canada’s Caisse De Dépôt et Placement du Quebec (CDPQ) has a similar dialogue-driven approach to helping investees reach their equity targets. The recently launched Equity 25*3 is a $250M PE/VC Fund growth-stage set up to bridge capital gaps faced by fast-growing and diverse-led/owned enterprises. They have a broad definition of diversity which specifically includes women, visible minorities, and indigenous populations. Their targets include representation of at least 25% diversity in the Board of Directors, management team, and ownership structure - with a deadline of achieving this objective within five years of confirmed financing. While “the real objective is not to knock people down” says Senior Director Barbara Boucher, it is important to show people they are serious. CDPQ recognise the importance of proving the diversity dividend, and seek to prove outperformance rather than no downside from their investments. It’s also critical to ensure the governance and leadership structure of the fund mirrors their diversity targets and definition. “Diversity attracts diversity’, Boucher says. Yet less than 1% of central banks, pensions, and sovereign funds currently achieve gender balance among senior staff, according to OMFIF.
The Leverage and Limitations of Policy
Timeline: Gender Lens Investing at Pension Funds (click to enlarge or download as pdf)
In addition to internal dynamics, the legal and social context drives pension funds’ sustainable investing agenda. In South Africa, the BBBEE (Broad-Based Black Economic Empowerment) Act provides a regulatory ‘stick’ for investors to prioritise diversity at a deeper level. But policy can also be a hindrance: in California, Proposition 209 makes it illegal to base investment decisions on gender or ethnic criteria. CalPERS (who seeded the State Street SHE ETF with $250M in 2016) found a way around this by targeting first time funds through an emerging manager program - a disproportionate number of whom are female and/or BIPOC.
In August 2021, an SEC ruling made it compulsory for companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. From 2022, the EU sustainable finance action plans will require mutual funds to ask clients their sustainability preferences and make the portfolios of those clients consistent with those preferences. In the Netherlands, there is a soft law agreement of the 50 biggest pension funds who have pledged to integrate sustainability and member preferences into their investment programs. In the UK, the Make My Money Matter campaign has resulted in significant commitments, although these disproportionately target climate change to the exclusion of other social risks.
“There's been some very positive progress’, says Catherine Howarth, CEO of ShareAction, which has been engaging regulators and investors for years over better stewardship of public capital. “There are some important legal requirements in the UK on pension schemes to consider ESG factors, and to have policies which require them to explain what kind of relationship they're having with investee companies, and what kind of challenges they're putting to the management where they see problems. But at the moment fiduciary duties are defined in a way that we regard as narrow and unhelpful.”
Representing Member Interests
“I think a lot of what drives pension funds’ mandate designs is the demographic of their beneficiaries. If you look at the GEPF membership, one could approximate a female beneficiary base of about 50% with majority of the members being Black as defined in the BBBEE Act. ”
That definition is evolving, however, and with it notions of what counts as material risk. Many pension fund members, particularly at public pension funds, are women: teachers, nurses, and employees. “They should look to their pension fund to champion women's interests in the economy and society regardless of whether that makes a higher financial return on those investments,” says Howarth. And 2019 research by US asset manager Franklin Templeton found that aligning with the values of members aged 22-38 through responsible investment policies could provide defined contribution (DC) schemes with an extra £1.2bn (€1.4bn) in annual contributions.
Australia’s Verve Super is one example of fund designed to meet member needs from the ground up. An “ethical super fund for women, by women”, it aims to close the 35% retirement savings gap with ethical allocation of its funds. Founded by Christina Hobbs, Alex Andrews, and Zoe Lamont, it was the first superannuation fund in Australia to apply a gender lens to investments. “I think a lot of what drives pension funds’ mandate designs is the demographic of their beneficiaries’, says Van Wyk. “If you look at the GEPF membership, one could approximate a female beneficiary base of about 50% with majority of the members being Black as defined in the BBBEE Act. Considering this membership demographic in the programme design was therefore critical to ensure alignment.”
Stronger Signals
Earlier this year, Norway’s $1.3T sovereign wealth fund, the largest in the world, made a public call for gender diversity targets on boards, implying that a failure to address the gap would result in missed investment. The fund (Government Pension Fund Global) does not explicitly mention gender in its sustainable investment practices, although they do cite the importance of workplace diversity and inclusion in investee companies. “The COVID epidemic has really exposed the cost of human capital management across industries, including health and safety as a material risk’, says Mike Garland of the NYC Comptroller Employees Retirement System, the fourth largest in the US, at a recent Wharton Pension Research Council conference. “Also the racial justice protests have shined a light on diversity and inclusion and are causing investors to redouble their focus on diversity.”
Pension funds are always in the limelight, and susceptible to public scrutiny, bureaucracy, paperwork and documentation as stewards of public dollars. This puts on the pressure to reflect the values of their current and future members. “What pension funds can do a lot better is to make sure that those mandates are more material relative to the rest of their portfolio, says Van Wyk. “Because if you read up on a pension fund or an asset manager, and the amount of marketing around that program, you might think that’s all they do.” Nonetheless when they act, the world pays attention, and they have immense power to make markets and drive investor behaviour.