The social and economic returns of investing with a gender lens

What is meant by return? Traditionally, investors focus on measuring the financial results of companies to decide how successful they are. However, in recent decades, the vision of return has been transformed at a global level to include social and environmental results within performance evaluations. It is no longer enough to measure and report financial indicators.

New criteria have emerged, such as ESG (Environmental, Social and corporate Governance), and new benchmarks to align the strategy and vision of companies and to compare their performance, such as the United Nations’ SDGs (Sustainable Development Goals). These have outlined a shared vision and specific goals for governments, the private sector and civil society, in the quest to eradicate poverty, protect the planet and ensure prosperity for all.

From this comprehensive perspective, it is important to understand what it means to invest with a gender approach, since this strategy allows receiving these three types of return. Investments with a gender perspective are those that are intentionally made in companies or solutions owned and/or led by women; these initiatives are not only created to close gender gaps in the labor market, but also to support products or services that are designed to cover specific needs of women and girls.

We live in a society where gender gaps in employment, salary and investment remain high. In LATAM, women receive between 10.6% and 22% less income than men in similar positions (Aequales, 2020). Additionally, only 5% of financing in Latin America and the Caribbean goes to companies led by women. The COVID19 pandemic has deepened these inequalities, for this reason, it is imperative as impact organizations to implement the gender approach as a transversal strategy within the organization's activities, because investing in women not only has a greater economic return, it is also a catalyst for global social and environmental impact.

Economic return

1.1 Women as the engine of macroeconomic growth

The economic return of an investment (ROI) is one of the main indicators that every investor reviews when making a decision. In this context, investing with a gender approach becomes a financially-smart decision, since, according to the OECD (2016), a 50% reduction in the gender gap in labor participation would increase 6% the gross domestic product (GDP) before 2030, with a further 6% increase if the gap were fully eliminated (World Bank, 2015). In addition, investing in women is a priority for recovering from the consequences of the pandemic, as they represent almost half of the workforce and are responsible for most of the spending decisions in a family.

1.2 Diversity and gender equality create profitability

At the company level, according to a McKinsey (2018) study, gender-diverse companies had a 13% increased internal rate of return (IRR) relative to the median, and diverse executive teams were 21% more likely to outperform the market in profitability and 27% greater probability of creating value.

Analyzing the results of entrepreneurships and startups, the initiatives developed by women generated $0.78 dollars in income more than the start-ups owned by men (2.5x times), and female entrepreneurs have lower failure rates than male entrepreneurs during their businesses transition from early stage to growth stage. However, according to MassChallenge and Boston Consulting Group (2018) in the search for capital in the early stages, women receive less support than men. While initiatives founded by women raise an average of USD 935 thousand, startups founded or co-founded by men raise an average of USD 2.1 million.

1.3 Persistent gaps in funding, leadership, and decision-making

According to UN Women, only 5% of financing in Latin America and the Caribbean goes to companies led by women, which confirms information from the IFC (2015), since the annual financing deficit of small and medium-sized companies owned by women in emerging markets is worth between $260 billion and $320 billion. There is a large funding gap that investors have the potential to fill (World Bank, 2015).

On the other hand, this disparity is not only in investment, but also in labor issues. Only 34% of the boards of directors in the region have women, who occupy only 37% of the C-Suite positions (UN Women, 2021). If you want to create policies and actions to promote development, it is necessary to involve women in all decision-making instances. Having women in leadership positions leads to more successful and disruptive innovations in the market (Díaz-García et al., 2013), and to have agile value chains as well as stronger relationships. It is also helpful to identify business opportunities and improve decision-making, showing that investing in women gives a greater economic return.

Social return

2.1 Women’s impact in their social circle, family and their community

Regarding social return, first, it is important to highlight that women in developing countries are a fundamental part of their family’s well-being and have a multiplier effect in their communities. According to Harvard Business Review (HBR, 2011), women reinvest an average of 90% of their income in their families, especially in health, education and nutrition, among others; unlike the 35% that men invest. By improving the income of women with greater opportunities for access to the workforce, financing conditions and training, the potential to improve the social well-being of entire families and their communities is increased, fostering a virtuous circle that positively impacts countries and communities in developing regions.

In addition, empowering women in vulnerable situations implies increasing their school attendance, delaying early-marriage rates and reducing their average number of children, which results in improving their future income, that of their families, and therefore increasing a country's wealth (GDP) while breaking poverty circles found among many regions (GLIS, 2021). Therefore, the best investment for a community are gender equality projects.

2.2 Value chains: Gap Reductions and Market Opportunity

From the perspective of productive chains in different industrial and commercial sectors, by supporting women suppliers, companies can boost competitiveness since it equips them with greater diversity and grants them access to new markets, adding further value to their supply chain (GLIS, 2021). The Food and Agriculture Organization of the United Nations (FAO) stated that if women farmers had the same access to financial resources as men, 150 million people could be saved from hunger (FAO, 2016).

According to an HBR study (2009), women represent a greater market opportunity than the economies of China and India combined. Women control approximately US $40 trillion of global consumer spending, that is, 85% of global household spending in 2020. This trend is mainly due to the importance of the female head figure in many households, where women are responsible for 70-80% of all purchases including their consumption, that of their partner, their children and other household needs.

However, despite the fact that women influence up to 85% of global consumption and that 37% of entities in the formal sector are owned by women, they only receive 2% of venture capital and in 2020 only 8% of impact investment funds addressed to SDG 5, Gender Equality (The Transatlanticist, 2020; Phenix Capital, 2020).

The intersection between social and economic impact materializes in the great market opportunity that women represent as clients, for businesses focused on solving their needs, improving access to specialized services and products for them, and as entrepreneurs and providers, for finance institutions and organizations that want to finance and support women-based productive projects.

The latter is a neglected market that deserves the attention of funds, private organizations and public policy-makers. Closing that gap means covering the unsatisfied demand for water, contraceptives, telecommunications services, energy, child care, among others, which will represent USD 300,000 million by 2025. It would also imply improving the conditions of financial products and services aimed at women, taking into account their best risk profile and all the economic benefits (social and environmental) assessed in this article, giving them prominence within the strategy of financial entities.

2.3 ESG and SDG criteria

A comprehensive study carried out by the IFC (2018) showed that involving women in leadership positions and directors boards increases social commitment and improves the quality of environmental, social and governance (ESG) performance in companies.

Additionally, by contributing to the sustainability and the growth of businesses founded or led by women, they contribute directly to UN Sustainable Development Goals 5 (Gender Equality) and 10 (Reduction of Inequalities). Indirectly, it contributes especially to SDGs 1 (No Poverty), 2 (Zero Hunger), 3 (Health and Well-being), 4 (Quality Education) and 8 (Decent Work and Economic Growth), through virtuous circles explained in the previous sections, where women play a central role in allowing and promoting a better quality of life for their families and communities, prioritizing well-being through the reinvestment of their income.

Finally, we would like to introduce an additional return that investment in and for women provides, directly and indirectly: the environmental return.

Environmental Return

Over the last two decades, global attention has increased on two of the most urgent challenges of our time: climate change and gender inequality. Climate change is "the most systemic threat to humanity" and "gender inequality is the world's greatest human rights challenge" (UN SG, 2018 and 2020).

Currently, climate change is having negative repercussions worldwide such as severe droughts and rising global temperatures. These issues harm food production, exacerbating the problem of hunger and drinking water access in vulnerable communities. Climate change is also causing the loss of millions of homes and challenging their means of subsistence. Millions of people are at serious risk, especially women and girls, who are providers of food, water and energy, but have fewer resources to adapt to changing conditions.

3.1 Link between gender and climate change

Women are disproportionately affected by climate change, in developing countries: (i) they are over-represented in the informal sector and have greater responsibility for livelihood activities, leaving them more exposed to climate-related impacts the weather; (ii) they have less access to financing and education, which increases their vulnerability to natural disasters and restricts their ability to mitigate the effects of climate change; and (iii) they are more exposed to gender-based violence, after climatic events (Convergence, 2020).

Awareness of the nexus between gender and climate change has increased in the last decade. Between 2010 and 2014, OECD Development Assistance Committee members increased official climate change support targeting gender equality at a faster rate (16%) than their overall climate change aid ( 3%). However, to be successful, these efforts must incorporate a strong focus on sustainable development and harness the knowledge, skills and networks of women to address climate change.

3.2 Women, a key factor in mitigating climate change

Evidence from a study by the CDC and the Berkeley Haas School of Business (2012) shows that women in leadership positions are more likely to improve energy efficiency, invest in renewable energy, and measure and reduce carbon emissions. Therefore, in addition to the aforementioned SDGs on social return, investing with a focus on women has the potential to contribute greatly to SDGs 7 (Affordable and Clean Energy), 11 (Sustainable Cities and Communities), 12 (Production and Responsible Consumption), 13 (Climate Action) and SDG 15 (Life of terrestrial ecosystems).

Greater efforts are needed to address gender equality and climate altogether, if we fail to do so the increase in global average temperature may reverse progress achieved so far on both issues.

Conclusion

I want to contribute: How to start?

It is a reality that in the investment world there are still unconscious biases that affect decision-making. The task of impact investors and/or social impact organizations is to be aware of actions that deepen gender gaps and develop strategies to resolve them. Not only changing the investment ecosystem, but also contributing to build more inclusive societies with more opportunities for all.

Throughout the article, we assessed the benefits that investing with a gender lense brings, both in businesses founded or led by women, and those that develop products and services specialized in their needs and problems. However, for many investors and organizations it is still a challenge to integrate this gender approach into their strategies, mission and vision.

NESsT has developed its gender inclusion strategy based on the following pillars, which can be applied in organizations to articulate all these benefits within their operations.

START at home, create internal policies that ensure having a gender approach and strengthen women participation in all instances of the organization.
DEVELOP quantitative and qualitative metrics that can be easily adopted by companies that wish to implement a gender approach in their strategy.
ENSURE that gender equality and inclusion are assessed and supported at both the due diligence and investment stages.
USE the metrics collected to guide your portfolio companies on ways to improve their business practices to support gender inclusion, well-being, and closing gaps for employees and suppliers.
INCREASE the representation of female entrepreneurs and employees in leadership positions, reflecting the intersectionality of the communities where their portfolio operates.
COMMUNICATE to fund investors and other major stakeholders, the main gender results of these investments.

From AlphaMundi Group and the AlphaMundi Foundation, collaboration between ecosystem institutions is considered crucial to share good practices and provide mentoring or technical assistance so that organizations can make this transition. Below, you will find links to initiatives and networks that promote investment with a gender approach in order to have an initial guide on how to implement this concept in the organization's practices and research on its positive impacts.

www.alphamundigroup.com

www.alphamundifoundation.org

1- 2X Challenge: summons the participants of the G7 and other DFIs to collaborate to mobilize, collectively, USD 3,000 million.

https://www.es2xchallenge.org/

2- Gender Lens Initiative for Switzerland (GLIS): seeks to enhance the Swiss contribution to SDG 5 (Gender equality and women's empowerment) through public-private partnerships, research, product development and promotion, evaluations of organizational models, awareness events and media coverage.

https://sfgeneva.org/what-we-do/work-groups/gender-lens-initiative-for-switzerland/

Authors

Alejandra Ramirez - Portfolio Director Peru- NESsT

NESsT provides personalized financial support and technical assistance to socially and environmentally responsible companies that have within their business model the creation of decent jobs, placements or income generation for vulnerable communities.

Angélica Giraldo - Analyst - AlphaMundi Group

AlphaMundi mobilizes private capital towards small and medium-sized companies with an impact on the fulfillment of the Sustainable Development Goals (SDGs), such as reducing poverty and preserving the environment in Latin America and Sub-Saharan Africa.