#BreaktheBias: a case for Gender Diversity in investment portfolios

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Julie Bech, co-Portfolio Manager of Nordea’s Global Gender Diversity Strategy

International Women’s Day presents a good opportunity to reflect on how Gender Diversity (GD) impacts not only boardrooms, but investment portfolios as well. In past years, we have seen increased focus on this issue, creating opportunities for active managers and enabling us to bring the new dimension of GD into the growing ESG investment movement.

The quest for gender equality has been going on for decades, and we have crossed several milestones. Investment wise, one of the most significant is the recent creation and distribution of the UN Sustainable Development Goals (SDGs), which have already played a big role in empowering society to achieve a more sustainable world. They have shone a light on specific ESG issues and led to a higher demand for sustainable solutions. Investors’ interest has increased and data in these areas has improved significantly. This has made firms more aware of their own impact on the world and the importance of that impact.

Although environmental elements have attracted most of the attention, social issues have also benefitted from the trend, albeit to a lesser degree. As our understanding of sustainability evolves, we expect more focus to be paid on the social aspect of the SGDs – including SDG #5: Gender Equality.

The business case for gender diversity

In the corporate world, gender diversity resonates as giving equal opportunities and conditions to individuals based on capabilities, regardless of their gender. But besides being key for an equal society it also pairs well with traditional return drivers. Gender diversity indicators therefore serve as an extra layer to the traditional investment process.

The debate over the connection between gender equality and stock performance is rapidly moving from the theoretical to the empirical, as evidence mounts demonstrating gender diversity can indeed make economic sense. Indeed, the business case for gender diversity is well-documented. A 2018 Nordea study analysed 100 Nordic listed blue-chip companies from 2004-2016. The study found that firms with the most gender-diverse management had 40% lower volatility in ROCE (return on capital employed). The companies in the study with more gender-diverse boards of directors also had significantly lower volatility in returns, although the results were most striking at the group management level. The study shows that the top 10% of those stocks generating the most stable ROCE outperformed the rest of the total group by 75% over 17 years.

McKinsey & Company’s 2020 global study of more than 1,000 companies in 15 countries found that organizations in the top quartile of gender diversity were more likely to outperform on profitability—25% more likely for gender diverse executive teams and 28% more likely for gender-diverse boards. At the other end of the spectrum, companies in the bottom quartile for both gender and ethnic/cultural diversity were 27% less likely to experience profitability above the industry average. Researchers measured profitability by using average EBIT margins As companies increasingly understand that greater diversity pays off, the push for gender diversity is perceived as a driver of corporate value creation and competitive advantage. We believe that companies that promote and favour diversity can achieve better results.

1 Nordea On Your Mind, Diversity as a value driver, Johan Trocmé and Ellen Benktander, 20.02.2018.
2 Sundiatu Dixon-Fyle, Kevin Dolan, Vivian Hunt, and Sara Prince, Diversity Wins: How Inclusion Matters (McKinsey & Company, May 19, 2020)

Extending Gender Diversity to investment portfolios

When actively selecting investment opportunities, we look closely at the gender diversity indicators. We consider the level of diversity in higher leadership levels, promotion and career development opportunities, inclusion and the change in these gender diversity indicators. This gives us an indication of the level of Diversity and Inclusion (D&I) in the company, in which areas they excel and in which areas they need to step up. This is also information that we use in the engagement process.

The companies in our investment universe must all live up to a minimum threshold in regards to gender diversity. This threshold is based on gender diversity in higher leadership levels as cultural change in an organisation needs commitment from the top. Breaking the glass ceiling and ensuring equal opportunities in top levels will benefit women throughout the organisations going forward. Focusing on diversity further highlights internal shortcomings with regards to maternity leave, recruitment of talent of both genders, etc.

The competitive edge these companies get from being diverse and inclusive is relative to peers. This means that the power of gender diversity indicators lies within stock selection. Consequently, we tend to be fairly region and sector neutral, relative to the market when selecting investment opportunities. We also prefer companies that – relative to their peers – are better positioned in regards to their overall Gender Diversity score. However, we also seek to capture companies that are improving in regards to their diversity measures, and sometimes these are not yet the companies with the best ranking.

Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A. and Nordea Investment Management AB (“the Legal Entities”) and their branches and subsidiaries. This document is advertising material and is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest Key Investor Information Document (where applicable) relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management AB recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions. Investments in derivative and foreign exchange related transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of the investment can greatly fluctuate and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Nordea Asset Management has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden and Luxembourg respectively. A summary of investor rights is available in English through the following link: https://www.nordea.lu/documents/engagement-policy/EP_eng_INT.pdf/. The Legal Entities’ branches and subsidiaries are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Investment Funds S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches and subsidiaries. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches and/or subsidiaries.

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