World over leading companies have articulated their commitment to gender diversity on their board of directors and in leadership positions. Publicly held companies have faced investor pressure to improve diversity among their director ranks, underscoring greater awareness of the need to address environmental, social, and governance (ESG) issues.

It is said that investors are increasingly incorporating assessments of companies’ gender diversity and equity to determine how they might respond to ESG risks and opportunities. But does the stock market reward firms who walk the talk on gender diversity? If performance of Indian companies and global firms is any indication, there is a mixed trend. Ahead of International Women’s Day on March 8, here is some food for thought. Here are some charts that tell the story.

The India perspective

Studies have found that firms with female CFOs are more profitable and have produced superior stock price performance compared to the market average. Separately, research has shown that firms with high gender diversity on their board of directors are more profitable and larger than firms with less gender diversity. 

But, the moot point is whether gender diversity helps stock returns in the Indian context? To check this, we need to see the performance of the MSCI India Women’s Leadership Select 30 Index, which aims to represent the performance of Indian companies that exhibit a commitment to gender diversity.

The eligibility criteria includes at least three female directors (or one female director and one woman in a leadership role, (2) percentage of female directors in the company should be greater than that of all companies in universe, (3) No severe structural or diversity-related controversies 

This index contains companies including Axis Bank, HDFC Bank, Infosys, Bharti Airtel, Asian Paints, HCL Technologies, Mahindra & Mahindra, Adani Total Gas, Ultratech Cement, Nestle India, Tech Mahindra, JSW Steel, HDFC Life Insurance and Wipro. There are 30 stocks in this portfolio.

Also read: RBI, SEBI have scores to scale on gender parity

As of December 31, 2022, the performance of the MSCI India Women’s Leadership Select 30 Index in the short-term (down 1.2 per cent in 1 year) has been muted, but the more long-term returns are attractive. For instance, in the two-year period, this benchmark delivered 13.8 per cent annualised returns and the gains expanded to 17.9 per cent annualised in a three-year period. Since inception (November 2019), the basket of stocks has delivered an impressive 18.3 per cent gains.

But how does the MSCI India Women’s Leadership Select 30 Index stack up against the MSCI India plain vanilla index? The answer to this would provide ammunition for investors, who would prefer firms that do more work on gender diversity compared to the general universe. Data shows that the MSCI India Women’s Leadership Select 30 Index is a better long-term bet given that its three-year gain of 17.9 per cent is over 300 bps more than MSCI India’s 14.7 per cent. However, the two-year returns of this special index barely eke out the MSCI India (see chart). So, giving time to such investments is a better idea because higher women’s representation may not produce results overnight.

Individually, stocks of many Indian companies that do their bit for gender diversity do sport good returns. The chart below captures some of the best performers from a three, five and 10-year perspective.

At the same time there are examples of stocks that have not done well, especially in the short-term. This could be due to company-specific issues such as Adani Total Gas, which is part of the MSCI India Women’s Leadership Select 30 Index (based on Dec-2022 data). The stock has dropped 53 per cent in the last one year in the aftermath of the Hindenburg Research report, but is up 79 per cent annualised in a three-year time frame.

Let us also take a look at how women have found representation on Indian company boards. Roughly, the share of women directors in corporate India (NSE-listed companies) is 19 per cent, while the share of women independent directors is higher at 23 per cent.

Tracking global champions of gender diversity

The MSCI Women’s Leadership Index can be used as a proxy to see the stock performance of global companies that exhibit a commitment towards gender diversity on their board and in leadership positions. As per latest information, the top holdings of the index are Shopify, ASM International, HubSpot, Zebra Technologies, STMicroelectronics, Amadeus IT Group, Twilio, Baker Hughes, Affirm Holdings and Western Digital. This index has over 600 stocks. Given such a large basket of stocks, it may not be easy for the ‘gender diversity’ factor to emerge strongly in equity returns.

Returns shows that this basket of champions of gender diversity have in the short term beaten the market, but longer term returns have lagged based on point-to-point data. For instance, MSCI Women’s Leadership Index, as on January 31, 2023, generated 100 basis points over the plain-vanila MSCI World index in a one-month period and over 400 bps in the three-month period. In the last one year when markets have generally fallen, the MSCI Women’s Leadership Index has been a better protector of wealth than the MSCI World basket. However, over three-year and five-year timeframes, there is a marked underperformance (see chart below). This underperformance could be due to various reasons.

From a valuation basis, MSCI Women’s Leadership Index and MSCI World are not that different as both the baskets sport trailing price-to-earnings (PE) of about 18 times and forward PE of 16 times. On the dividend yield front, the MSCI Women’s Leadership Index offers a slightly higher bang for buck (2.33 per cent) compared to 2.09 per cent for MSCI World.

Let us look at annual returns to see whether shares of companies that display a commitment towards gender diversity on their boards and in their leadership positions are rewarded by the market. From 2017 to 2022 i.e. a six-year period, the MSCI Women’s Leadership Index has lagged MSCI World in every calendar year. This shows that markets have so far not rewarded the basket of stocks that apparently lead gender diversity (see chart below).

Sectorally, the MSCI Women’s Leadership Index is not skewed towards one sector. It has exposure to Information Technology (20.64 per cent), Financials (14.58 per cent), Healthcare (13.57 per cent), Consumer Discretionary (11.15 per cent), Industrials (10.55 per cent), Consumer Staples (7.55 per cent), Communication Services (6.44 per cent), Energy (5.22 per cent), Materials (4.6 per cent), Utilities (2.98 per cent) and Real Estate (2.73 per cent).