Changing the status quo Women and ESG
The growth in investor demand for environmental, social and corporate governance (“ESG”) product offerings coupled with a global societal push to implement measures to promote sustainable finance has focused the minds of fund managers and legislatures alike to ensure that investment products are available that strive for alpha measured in both monetary and societal return.
In this article, we will examine the rise of global female wealth and its role in the ESG movement.
The rise of female wealth
The research is clear - women are becoming richer and controlling more of the world’s wealth. Women are now significant wealth creators and arguably an emerging investor class. According to Boston Consulting Group, between 2010 and 2015 private wealth held by women grew from US$34trn to US$51trn and by 2020 women are expected to hold US$72trn, which would equate to a total of 32% of all private wealth.1 Women’s earnings have grown exponentially and with increased focus globally on closing the gender pay gap these earnings are expected to continue to increase. In Ireland, for example, the Gender Pay Gap Information Bill 2019 is making its way through the legislative process.2
The rise in female wealth is resulting in a shift in investment managers’ client demographic. In order to remain competitive, consideration needs to be given to the changing priorities of potential investors. Eva Lindholm, Head of UBS Wealth Management in the UK and Jersey, has noted3 that women have for a long time looked at wealth differently with even women from more traditional societies engaged in social, philanthropy and community directions. Research also suggests that women are more likely to invest in impact or gender lens investing. One example of this is, Ellevest an investment platform that is driven by women for women offering strategies which invest in a custom mix of companies making an impact on the areas which the investor cares most about. Add to this the emphasis placed by the millennial generation on ESG and sustainability and asset managers cannot afford to ignore ESG factors.
A large number of ESG focused investment funds have been established to cater for investors seeking to improve the ESG composition of their portfolios. At the start of 2018, global sustainable, responsible and impact investment assets reached $30.7 trillion ($17.5 trillion of which applied to ESG integration), a 34% increase from 2016, with Europe accounting for $14.1 trillion in assets under management followed by the US with $12 trillion.4
European legislative proposals to facilitate ESG investment
European regulatory proposals to implement a package of measures implementing the European Commission’s Action Plan on Sustainable Finance launched on 8 March 2018 are currently working their way through the European legislative process. It is expected that these legislative reforms will provide more transparency to investors, comparability of information and address risks of greenwashing when assessing the ESG focus of investment products.
Once enacted these regulations and related delegated acts will: (i) establish a unified classification system (“taxonomy”) on what can be considered an environmentally sustainable and economic activity making it easier for investors to identify sustainable activities and to channel investment into such activities5 (the “Taxonomy Regulation”);
(ii) introduce disclosure obligations on how institutional investors and asset managers integrate ESG factors into their investment and risk processes (the “Disclosure Regulation”)6; and (iii) amend Regulation (EU) 2016/1011 (the “Benchmarks Regulation”) to create a new category of benchmarks comprising of low-carbon and positive carbon impact benchmarks as well as provide for ESG disclosure requirements applicable to all investment benchmarks. While the Taxonomy Regulation is focused more on the environment strand of ESG, the Disclosure Regulation is intended to ensure that financial market participants (including AIFMs, UCITS management companies and investment firms) consider and integrate sustainability risks (meaning environmental, social or governance events that if such events occurred could cause an actual or a potential material negative impact on the value of the investment arising from an adverse sustainability impact) into their investment and risk processes.
Amendments to existing legislation under the AIFMD, MiFID and UCITS regimes governing how asset managers and investment advisors should integrate sustainability risks and factors have also been proposed with the European Securities and Markets Authority (“ESMA”) providing its final technical advice to the Commission on these proposals on 30 April 2019.8
In addition, the EU Technical Expert Group on Sustainable Finance (“TEG”) recently recommended to the European Commission to create a voluntary, non-legislative EU green bond standard.9
Investor communication on ESG metrics and performance
As with any investment strategy, clear investor disclosure and communication is paramount. Increasingly investors are seeking confirmation from asset managers as to how ESG criteria influence their processes in practice and are requiring periodic reporting on ESG metrics. The disclosure of such information in offering documents and reports is important to ensure that shareholders and potential investors are aware of how and to what extent ESG factors play a role in an asset manager’s processes. Further policy changes and pre-contractual, website and periodic reporting disclosures will be necessary once the European proposals come into force. For instance, the TEG has issued recent reports which will underpin the delegated acts for the Taxonomy10 and Benchmarks Regulation, providing investors with the tools to identify screening criteria and standardise reporting. The European Commission has also recently issued guidelines on climate-related information reporting on the impact that companies’ activities are having on the climate and the impact of climate change on their business.12
Gender diversity as a component of ESG
The drive for increased diversity of opinion and perspective in investee companies is a core component of the “G” or “Governance” limb of ESG. The importance of gender diversity initiatives is not a new concept but law-makers, regulators and investors are calling for greater gender diversity in organisations. While progress is being made, female representation in the c-suite is still strikingly low. In December 2018, the FT reported that women still account for fewer than 5% of the chief executive positions in the US, UK and Europe.13 Stakeholders require that an organisation’s gender diversity statistics stand up to scrutiny and should represent females with a meaningful and not marginal role in an organisation’s management. It was recently reported that Willis Towers Watson14 is prepared to downgrade firms that fail to improve their diversity.
This sentiment is echoed by regulators and policy makers. In his speech at the National Diversity & Inclusion Conference in September 2019, Director of Financial Stability at the Central Bank, Vasileios Madouros, said that “In 2018, women accounted for only around 1 in 4 of the applications for approval [for senior roles in regulated firms] that the Central Bank received. This was an improvement from previous years – when women accounted for around 1 in 5 of those applications for approvals. But it’s still a striking statistic. The good news is that, from a regulatory perspective, diversity is supervisable. And that is exactly what we are doing. We expect regulated financial institutions to meaningfully address diversity and inclusion in the boardroom, at the executive level and in the pipeline of talent needed to run the organisation in the long-term.”15
Legislation has already been enacted16 which requires certain large companies to report to shareholders on : (i) the objective, implementation and results of the diversity policy (with regard to age, gender, educational and professional backgrounds of the board of directors) ; and (ii) the impact of its activity on environmental, social and employee matters, respect for human rights, and bribery and corruption. CRD IV and MIFID II and the associated joint guidelines issued by ESMA and the European Banking Authority 17 require credit institutions and investment firms to put in place a policy promoting diversity on the management body in terms of age, gender, geographical provenance, educational and professional background.
These legislative requirements highlight the importance placed on ensuring diversity at board level and the increased effort to overcome the risk of “group think”.
The global rise of female wealth and global focus on the importance of gender diversity at c-suite level is changing the traditional investment approach. ESG, impact and gender lens investing will continue to evolve and respond to the needs of an evolving investor base. European legislative and policy initiatives will seek to improve investors’ ability to assess the ESG characteristics of investment products.
As the old saying goes “Money talks”, but will the rise of women’s wealth create a new narrative? Time will tell.
Sarah Maguire, Eimear Keane and Jill Shaw at Walkers
1. The Economist, March 2018 ‘Investment by women, and in them, is growing’ https://www.economist.com/finance-and-economics/2018/03/08/investment-by- women-and-in-them-is-growing.
2. The Bill provides for the Minister for Justice and Equality to make regulations requiring employers to publish information relating to the remuneration of their employees to show whether there are differences in such remuneration referable to gender, and, if so, the size of and reasons for such differences and the measures being taken to eliminate or reduce them.
3. Harper’s Bazaar, July 2019. See further, UBS Whitepaper “Perspectives from women of impact: Redefi Legacy”, July 2019. Eva Lindholm, “Women of Impact: why wealth management industry needs to do more to understand and support female visionaries, linked-in, 16 July 2019.
42018 Global Sustainable Investment Review.
5. Proposal for a Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment – COM(2018)353/978670.
6. Proposal for a Regulation of the European Parliament and of the Council on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341 – COM(2018)354/978576.
7. Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2016/1011 on low carbon benchmarks and positive carbon impact benchmarks – COM(2018)355/978587.
8. ESMA Final Report: ESMA’s technical advice to the European Commission on integrating sustainability risks and factors in the UCITS Directive and AIFMD, 30 April 2019, ESMA34-45-688. ESMAFinal Report: ESMA’stechnicaladvicetothe European Commissiononintegratingsustainabilityrisksandfactorsin MiFIDII, 30 April 2019, ESMA35- 43-1737.
9. EU Technical Expert Group on Sustainable Finance, Report on EU Green Bond Standard June 2019.
10. EU Technical Expert Group on Sustainable Finance, Taxonomy Technical Report, June 2019.
11. EU Technical Expert Group on Sustainable Finance, Final Report on Climate Benchmarks and Benchmarks’ ESG Disclosures, September 2019.
12. European Commission Guidelines on non-financial reporting climate-related information, Brussels, 17.6.2019.
13. The Financial Times, December 2018 ‘Women hold fewer than 5% of CEO positions in US and Europe’ https://www.ft.com/content/1090105c-fb7b-11e8-aebf- 99e208d3e521
14. Ignites Europe, October 2019 ‘Asset managers struggle to address diversity’ https://www.igniteseurope.com/c/2532433/302253
15. Diversity and Inclusion: why it matters for the Central Bank – Vasileios Madouros, 4 September 2019 https://www.centralbank.ie/news/article/speech-vasileios- madouros-diversity-and-inclusion-04-sept-2019
16. European Union (Disclosure of Non-Financial and Diversity Information by certain large undertakings and groups) Regulations 2017, as amended, implementing Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups.
17. Final Report: Joint ESMA and EBA Guidelines on the assessment of suitability of the management body and key function holders under Directive 2013/36/EU and Directive 2014/65/EU (EBA-GL-2017-12).