Gender-focused investment funds grow despite attacks on ESG

After significant outflows and political criticism that raised uncertainty about the future of ESG, gender lens mutual funds recovered in the first quarter of 2024.

Gender lens mutual funds, ETFs of companies committed to promoting gender equality in their workforces, products and services, saw assets under management grow 9.5% quarter over quarter. Publicly traded gender lens mutual funds managed $4.6 billion in assets as of March 31.

The strategy behind gender lens investment funds emerged from studies that found that bringing women into leadership positions can be financially and operationally beneficial for companies.

“There is research that shows that ESG issues are discussed more frequently when women are on boards, and that is certainly true for environmental and sustainability. So ultimately, including women is a smart investment strategy,” says Kristin Hull, founder and chief investment officer of Nia Impact Capital, a women-led asset management firm based in Oakland, California.

READ MORE: How consultants can increase ROI with gender lens investing

In a study by Parallelle Finance, a firm focused on gender investing research, analysis and advocacy, gender investing funds are defined by the percentage of women in leadership positions at a given company, transparency regarding pay equity, and policies to encourage the retention and promotion of women in leadership positions.

“The research we’ve done goes some way to proving that these different views, disagreements, different approaches to risk management and other activities should be part of the leadership team,” says Angela Atherton, head of operations and strategy at Parallelle Finance.

Of the 42 gender lens mutual funds currently available to investors, more than half underperformed the broader market indices in the first quarter of 2024. Six indices outperformed the market indices and seven matched the performance of the market indices.

“The asset class requires an expanded investment universe and we believe continued growth in corporate equality metrics provides these funds with the opportunity to deliver above-average performance,” the report said.

Hull described the nationwide student protests in response to the war between Israel and Hamas as a helpful movement to increase the growth of gender investments.

“And these are closely linked to the gender perspective, because these movements are asking all of us to just ask ourselves, ‘What’s in my portfolio? Do I have fossil fuels? Do I have any of these other things?'” she said. “And then we can start asking, ‘Do I have a woman as a manager? Do I have one?’ And so I’m grateful to anyone who asks the question, ‘What am I investing in?'”

Atherton noted that young people are also driving demand for impact investing strategies.

“I think we’re seeing more and more investors in general, especially younger investors, female investors, showing interest when you tell them there’s an opportunity to invest their money in a way that’s consistent with their values,” she said.

The growing interest in gender lens mutual funds reflects broader trends of growing demand for ESG funds, which held $900 million in assets under management in the first quarter.

The growth could be part of a comeback for ESG funds, which have suffered capital outflows after facing criticism from Republican politicians such as Florida Gov. Ron DeSantis, who called ESG an attempt to “bring a woke ideology to the global market.” And states such as Texas have passed or are considering laws that prohibit working with banks and asset managers that they place too much emphasis on ESG, or that prohibit investments in companies that make weapons or extract and refine oil.

From 2021 to 2023, global ESG fund assets under management fell 930%, and the asset class will face net outflows of $13 billion for the first time in 2023.

READ MORE: Can ESG rise from the dead?

Marketing agency AKQA, UN Women Nederlander and investment research platform Thematic launched the Pink Chip Equity Index in early May, a nonprofit initiative that measures female leadership in companies, similar to how the Blue Chip and Green Chip indices measure sustainability and reputation, respectively. The index, which tracks publicly traded companies in the US with a market capitalization of over $2 billion, includes 44 companies.

As with the gender lens equity funds, gender bonds also grew, with total assets under management of USD 18.5 billion. Quarterly growth in assets under management for these funds was 4.1%. The best results in the first quarter were achieved by gender bonds and sustainability bonds. During this period, six gender bonds matured.

The largest share of gender bonds, mostly from the World Bank, came from emerging markets.

“We view women-owned businesses of all sizes as an opportunity for investors in developed and developing countries alike,” the report says.

While the report focused on the gender perspective, many of the funds’ strategies are based on other ESG-based perspectives such as sustainability and DEI or diversity, equity and inclusion.

“If we incorporate the gender perspective early on and women really seem to pay attention, they are less likely to want to throw something into a river or sea,” Hull said. “There seem to be differences that women understand the circular economy better, so they are not as willing to take shortcuts when it comes to the environment as men.”

DEI funds, which invest based on companies’ diversity metrics, also grew. These funds managed a total of $2 billion and recorded 7.1% quarter-over-quarter growth.

“If you are interested in ESG, we see no reason why you should not, where possible, incorporate equality law into the selection criteria or investment criteria when building your portfolio,” Atherton said.