Impact Investing: A Catalyst for Reducing Gender Inequalities
Introduction
What is impact investing?
Impact Investing refers to investments made to generate positive, measurable social and environmental impact alongside a financial return. [i] These investments are not restricted to particular markets and can occur in emerging and developed markets. While the financial returns may vary, the target range typically spans from below-market to market-rate returns, depending on the investors' objectives. [ii]
Gender inequality, a pervasive global challenge, casts its shadow over various aspects of women's lives, from education and employment to healthcare accessibility and participation in decision-making processes. Over the past decade, impact investing has emerged as a catalyst for change, offering a pathway towards gender equality. This article delves into the transformative effects of impact investing on reducing gender inequality.
To illustrate the impact of impact investing on gender inequality, we will examine specific statistics and trends over the last ten years.
Increasing Commitment to Gender Lens Investing
Gender lens investing (GLI) has emerged as a powerful tool for driving progress towards gender equity.[iii] As a subset of impact investing, GLI seeks to promote gender equity and close the persistent gender gap. According to recent data, the gender pay gap in the U.S. remains at 19%; 26% of corporate board seats in Russell 3000 companies are held by women, and only 14% of fund managers are female).[iv]
However, GLI has gained traction in recent years, as there is compelling evidence that pursuing gender equity as an investor will positively benefit investment, business, and society and inspire and motivate others to support this approach.
Studies show that companies with more gender-diverse teams consistently outperform their less-diverse peers. For instance, a Blackrock report found that the most diverse workforces outperformed their less varied counterparts by 29% on average.[v]
Moreover, investor sentiment has shifted dramatically, with many high-net-worth individuals considering gender-inclusive policies and diverse leadership as essential criteria when making investment decisions. A recent Morgan Stanley survey found that 67% of investors said companies must have policies promoting diversity, equity, and inclusion, while 66% and 63% prioritized hiring/promoting diverse employees and having diverse leadership. [vi]
Increased Funding from Women-Led Ventures and Enterprise
The growing recognition of the immense potential of women-led businesses has led to a surge in investment and funding directed towards this segment in recent years. According to research by Venture Capital Journal, women-led funds’ share of total fundraising increased to about 3% of the $107 billion raised last year by venture funds worldwide.[vii] This shift reflects the increasing awareness among investors of the strong business case for supporting women led businesses. Studies have shown that companies with women in leadership roles often outperform their male-led counterparts, generating higher returns and driving sustainable growth. [viii] Initiatives like the HerMeNow Accelerator in the MENA region and Sweef Capital's investments in Vietnam are examples of targeted efforts to empower women entrepreneurs and channel more capital towards women-led ventures.
While significant funding gaps remain, the upward trend in investments directed towards this segment signals a growing recognition of the immense value that women-led enterprises bring to the table.
Growth in Investments Focused on Women’s Economic Empowerment
Impact investing has not only increased funding for women-led businesses but also sparked initiatives focused on women's economic empowerment. Innovative programs like the 2X Challenge have helped channel over $16 billion towards gender lens investments [ix], which are directed towards initiatives and enterprises focused on women's economic empowerment. This increased funding has helped bridge female entrepreneurs' persistent funding gap, as women-led startups have historically received a disproportionately small share of venture capital investments.
Promoting Gender Diversity in Leadership Roles
Impact investors are playing a pivotal role in driving progress towards greater gender diversity in corporate leadership. By prioritizing investments in businesses committed to gender inclusion, they are helping to break down barriers and challenge traditional gender norms.
By actively engaging with companies to ensure they implement policies and practices that foster gender diversity, impact investors are not only signaling the importance of this issue but also creating tangible results. Through targeted investments, they can incentivize companies to recruit, retain, and promote women into leadership positions, ultimately leading to more diverse perspectives at the decision-making table. A study by McKinsey found that companies in the top quartile for gender diversity on their executive teams were 25% more likely to have above-average profitability than companies in the bottom quartile.[x]
Moreover, impact investors can use their influence to encourage transparency and accountability regarding gender diversity metrics, pushing companies to set and achieve meaningful goals in this regard. [xi] In doing so, they are not only driving social change but also contributing to improved financial performance and long-term sustainability for businesses. Research by the Peterson Institute for International Economics revealed that having at least 30% women in C-suite positions is associated with a 6% increase in net profit margin.[xii]
How can investors continue to advance gender equality in investment practices?
According to the 2020 UN Women Report, the following are a few ways to incorporate the principles and perspectives of feminist economics into investment practices:
- Strengthen due diligence: Screen investments for companies that promote gender equality and actively manage the risks of negative externalities on gender equality.
- Enable participatory decision-making: Support shifts in power to value and engage women and marginalized groups directly in investment decision-making.
- Prioritize economic empowerment: Prioritize investments that promote women's economic empowerment, including access to decent work, equal pay, and entrepreneurship opportunities.
- Enhance transparency and collaboration: Practice transparent reporting on gender lens investments. Foster collaboration among investors, feminist economists, activists, civil society, and gender experts.
- Adopt a long-term, transformative approach: Invest with a long-term perspective that considers sustainable and transformative change, rather than short-term financial returns.[xiii]
Challenges and Future Prospects
Despite significant progress, gender inequality remains a persistent challenge globally. While impact investing is not a universal remedy there are ongoing challenges that need to be addressed:
- Ensuring impact reaches the most marginalized women.
- Need for standardized impact measurement.
- Risk of "impact-washing"
However, the commitment and momentum behind gender lens investing offer promising prospects for the future:
- The impact investing ecosystem is likely to attract even more capital and support from traditional investors seeking to align their portfolios with gender equality objectives.
- Ongoing collaboration between local and international players can further empower women and reduce gender disparities.
- The potential for impact investing to drive progress on gender equality remains a beacon of hope for advocates.
Conclusion
In conclusion, impact investing has emerged as a powerful catalyst for reducing gender inequalities, driving positive social change while generating financial returns. Through initiatives like gender lens investing and targeted funding for women-led enterprises, impact investors are reshaping the landscape of corporate leadership, economic empowerment, and societal norms. By prioritizing investments in businesses committed to gender inclusion and actively engaging with companies to ensure the implementation of gender-diverse policies, impact investors are not only signaling the importance of gender equality but also creating tangible results.
By Cyrielle Delaunay, From Northeastern University
**References**
[i] https://thegiin.org/impact-investing/need-to-know/
[ii] https://thegiin.org/impact-investing/need-to- know/#:~:text=Impact%20investments%20can%20be%20made,depending%20on%20investors'%20strategi c%20goals.
[iii] https://www.unwomen.org/sites/default/files/2024-02/empowering-women-building-sustainable- assets.pdf
[iv] https://www.morganstanley.com/articles/gender-diversity
[v] https://www.blackrock.com/corporate/literature/whitepaper/lifting-financial-performance-by-investing-in-women.pdf
[vi] https://www.morganstanley.com/articles/gender-diversity
[vii] https://www.venturecapitaljournal.com/women-led-firms-raised-more-capital-in-2023-despite-lack-of- mega-funds/
[viii] https://www.weforum.org/agenda/2024/01/sustainable-finance-women-of- colour/#:~:text=The%20evidence%20is%20clear%3A%20companies,metrics%20over%20the%20past%20d ecade.
[ix] https://www.2xchallenge.org/press-news/2xchallenge-raises-16billion-in-2-years
[x] https://www.mckinsey.com/featured-insights/diversity-and-inclusion/diversity-wins-how-inclusion-matters
[xi] https://www.mckinsey.com/featured-insights/diversity-and-inclusion/diversity-wins-how-inclusion-matters
[xii] https://www.piie.com/commentary/op-eds/study-firms-more-women-c-suite-are-more-profitable
[xiii] https://www.unwomen.org/sites/default/files/2024-02/empowering-women-building-sustainable- assets.pdf
