Investing in gender equality: Momentum is growing

Summary

Key takeaways

Multi-stakeholder (investors, the scientific community and issuers) needs to work handin-hand to channel capital towards adaptation solutions that are able to deliver material impact across sectors as mitigation efforts alone cannot halt the negative effects of climate change.
Climate adaptation and resilience remains underfinanced, with a significant and growing gap of US$194-366 billion per year, or 0.6%-1.0% of GDP for developing countries.
For investors, climate impacts that materialize through chronic and acute physical risks have a direct or indirect influence on investments. Investors need to examine their physical risk exposures across the supply chain of investee companies.
Although there are limitations for integrating physical risk due to data and methodologies challenges, it is critical for investors to startpricing in these risks into their financial modelling and their investment decision process. This paper will explore the different ways and methods investors may use to start doing accounting for these climate risks.
To support investors in this journey, Amundi integrates adaptation consideration into investments through various ways, including a dedicated climate change framework via AIIB-Amundi Climate Change Investment Framework, and green bond funds investing in resilience bonds or similar instruments. In addition, physical climate risk is part of Amundi’s responsible investment approach and stewardship activities.
Additional investment solutions exist to break financing barriers include blended finance arrangements, public-private partnerships, and investment instruments such as resilience bonds, catastrophe bonds, and insurance-linked securities.

1) The climate adaptation finance gap continues to widen

The science is clear: mitigation efforts alone cannot halt the negative effects of climate change. The world needs to prepare for physical climate changes even if we successfully meet the Paris Agreement goals. The increase in frequency and severity of acute climate hazards is expected to surge in the coming years, and will have a profound impact in several parts of the world. Moreover, the distribution of anticipated acute weather events is disproportionate and uneven, biased toward more vulnerable populations.

According to the World Economic Forum, extreme climate events are of upmost global concern both in the short- and long-term horizon (ranked as top 2 risk over the next 2 years, and top 1 risk over the next 10 years)2. Notwithstanding the persistent signals of worsening climate risks and related impacts, the climate adaptation financing gap continues to widen: for this decade it is estimated at US$194bn to US$366bn per year for developing countries1. As such, adaptation finance needs are 10 to 18 times greater than current flows, 50% more than previous estimation.

The rate of change and the severity of climate impacts is, however, highly dependent on near-term mitigation and adaptation efforts. The planning and implementation of adaption and resilience, and the iteration of adaptation cycles need to be accelerated in this decade. Similarly, mitigation efforts to limit the increase of the global average temperature can help ensure that the largest number of adaptation options remain available to us, thus avoiding the worse possible impacts from climate changes and associated loss and damage down the road. Hence, a dramatic increase in financing for both mitigation and adaptation are required to close the global investment gap and achieve long-term climate goals.

2) Physical risks and investors’ perspective

a) Defining physical climate risks

Physical climate risks are multi-dimensional and typically viewed as an interaction of three core dimensions: hazard, vulnerability and exposure, as well as reflecting the interdependencies of climate, socioeconomic impacts, and biodiversity and natural ecosystems.

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b) Why physical climate change impacts matter for investors

For investors, climate impacts that materialize through both chronic and acute physical risks have a direct and indirect influence on investments. Loss and damage to an investee company’s assets will increase CAPEX costs and operational disruptions will affect margin and/or sales. Combined, these effects can significantly increase downside risk. Conversely, the increasing linkage of adaptation and resilience with investment needs and opportunities means that businesses will face stiffer competition to innovate and explore new opportunities. According to the World Economic Forum, climate risks could hit around 10% of annual turnover, or 4% of the market value for businesses3, and potentially have wider impacts across value chains and global economies. Tackling this issue will require companies to change their corporate strategy, develop new partnerships, and venture into new markets.

It is vital for investors to thoroughly assess the impacts of climate change on investment portfolios in granular detail, i.e., down to the investee company and asset-level (see Table 1 below). For example, this includes climate hazards that were once considered less material (e.g., the financial impact of extreme heat) as effects further intensify and become more impactful.

Besides assessing companies at the entity level, it is critical for investors to evaluate the impact that physical climate risk pose to entire supply chains. Investors need to assess both the upstream and downstream physical risk exposures of their investee companies as climate hazards can exert a knock-on effect throughout the supply chain which creates volatility in the market and additional downside risk for investors.

However, it should also be acknowledged that physical risk is a complex subject that poses challenges for investors. Given that physical risk is non-linear, it is difficult to anticipate the exact time and locations where the extreme climate events would occur and their impact. The lack of tools and established methods available for investors to account for physical risk into company or asset valuation further compounds to difficulties in factoring physical risk into investment decisions. Despite the limitations, the following sections will explore current methods that investors may utilize to incorporate physical climate risk into their investment processes.

Table 1: Examples of extended impacts

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c) Accounting for physical climate risks in investment portfolios

Cost-benefit analysis

Investors can incorporate physical risk assessment and data to evaluate the resilience of their portfolios in several ways. One important aspect is the cost-benefit analysis of resilience options. This analysis involves comparing the proposed expenditure or investment with the expected monetary benefits. It is crucial to consider both financial, and environmental and social parameters, which may need to be translated into economic values.

Financial analyses typically use the discounted cash flow (DCF) methodology, which takes into account adjustments to cashflow forecasts, such as changes in sales, growth or erosion of margin, and increased CAPEX requirements (and thus net debt position). With access to suitable data, investors can consider potential extra costs resulting from physical climate hazards, and adjust discount rates in line with such longer-term risks. This ensures that the DCF methodology can effectively capture the value of resilience options. As such, it is possible to calculate a climate risk-adjusted net present value (NPV) of an asset's cash flows, and compare the costs of doing nothing to those of adapting.

The methodology for adjusting discount rates in relation to climate risks is still subject to debate. One approach is to consider modifying an asset's credit rating by incorporating its level of resilience readiness. The concept of a climate risk scorecard can be used as a measure, similar to the one developed by Ceres that evaluates entities on several physical risk-related dimensions such as whether scenario analysis is conducted, level of transparency over climate-related risk management activities and quality of climate disclosures. The yields of listed bonds with similar ratings can then be compared to estimate the delta in the cost of debt.

Financial analysis can also be conducted from an equity valuation perspective by considering the cost of equity for companies that are implementing resilience measures. Climate resilience measures reduces the risk-level of cash flows and can lead to reduced cost of equity for resilient-ready companies. However, there is currently no consensus on how to translate this into an adjustment to the CAPM cost of equity formula.

Academic circles are exploring various considerations, such as a climate-risk premium and adjustments to the "beta" used in the weighted average cost of capital of the CAPM. These efforts aim to develop more robust methodologies for incorporating climate risks into investment frameworks and ensuring that private investors can make informed decisions based on accurate physical risk assessments.

Engaging companies on gender equality: the role of investors

Another lever of action for investors to promote gender equality is through stewardship activities, including engagement and voting practices. For several years now, Amundi has been engaging with companies on the subjects of gender equality and the benefits of diversity, particularly within governance bodies. By 2023, Amundi had engaged with 482 companies on this subject¹², i.e. 19% of the total number of companies engaged. This has enabled us to better understand the context, challenges faced by companies and identify best practices.

Unsurprisingly, we find a gendered distribution across sectors. The science, technology, engineering and mathematics (STEM) sectors are heavily dominated by men, while women are working in the majority in services (healthcare, education, accommodation and catering, etc.). This difference has an impact on the financial resources of both genders, since the first sectors are the most lucrative from a remuneration standpoint, perpetuating the fact that capital is predominantly held by men. We also note that, even in highly lucrative sectors with a strong representation of women, governance bodies tend to be predominantly male. This is the case, at various levels, in the following two sectors that we view as particularly illustrative¹³:

Engaging companies on gender equality: the role of investors

In sectors with a high proportion of women in the workforce, the number of women tends to shrink with each new rank in the hierarchy. At LVMH, women represent almost two-thirds of the workforce, yet they account for just 14% of the Executive Committee members and 27% of designers within the Group.

However, since 2017 and the #Metoo wave, we have seen companies take this issue more seriously. The liberation of women's voices led to the departure of a number of male employees, including senior managers, as a result of inappropriate behavior towards women. For example, the former CEO of L Brands was removed from the company’s Board under shareholder pressure amid allegations of pervasive sexual harassment at the company’s subsidiary, Victoria’s Secret. These allegations also led to a shareholder lawsuit purporting that Board members concealed their knowledge of the misconduct.

To account for these growing demands for equality, we have seen companies appoint Diversity Managers, often for the first time, and put in place Diversity, Equality and Inclusion (DEI) policies. Companies have also set quantitative targets for women’s representation, particularly in governance bodies. This trend has also been fueled by a growing body of legislation. In France, this began in 2011 with the obligation for large companies to have at least 40% of women on boards of directors. Ten years later, the Rixain law introduced a requirement for companies to have 30% women on executive committees by 2026¹⁴ and 40% by 2029. Other European countries established similar rules, introducing a quota for women - or, more precisely, a quota for the under-represented sex - in their governance bodies, namely Germany, Austria, Belgium, Greece, Italy, Norway, the Netherlands and Portugal¹⁵. In Japan, since 2023, companies listed on the Prime Market have to appoint one female director by 2025 and reach at least 30% of women directors by 2030. In India, the 2013 Companies Act requires companies to have at least one female director. In the absence of legislation, companies face representation expectations in the form of soft law such as Governance Codes or equivalent – as is the case in Ireland, Israel, Poland, Sweden Turkey and the UK. This appears to have also contributed to progress: a number of companies in these countries have pledged to have at least 30% of women on their boards by 2025 or 2030.

Despite an initial outcry against the introduction of quotas for women in corporate governance bodies, regulations appear to have succeeded in shattering the glass ceiling: 10 years after the Coppé-Zimmerman law, France has gone from 10% in 2009 to over 45% women on CAC 40 and SBF 120 boards in 2020¹⁶. In the UK, where gender diversity guidance is included in the Governance Code, women now hold 42% of board seats across large firms versus below 10% in 2018 - even though there were only 10 female CEOs amongst the FTSE 100 directors¹⁷. This suggests that soft law can also be effective at improving representation.

Among the best practices identified for women’s progression, we note the following: implementing a gender balance among the workforce, Acknowledging there is an issue and closing the gender pay gap, Developing dedicated training and mentoring programmes, Making parity a fight for both genders, Monitoring progress.

Our discussions with companies also enabled us to defuse a stereotype: the sectors where women are least present are not necessarily those where DEI policies are least developed. In fact, some companies have enacted solid policies and have seen a sharp increase in the number of women employed. For example, Legrand, a global specialist in electrical and digital building infrastructure company, aims to have 33% of women in the top 400 jobs by 2030. Over the last decade, the company has already managed to increase the share of women in leadership roles from 15% to 25%, which puts it on track to meet its target. This was possible thanks to several actions, including talent review sessions to increase the pipeline for recruitment and internal promotions, assigning sponsors within the company, and diligently monitoring compensation packages. The concerted effort, as well as the CEO’s commitment to reaching these goals, demonstrate an effective approach to advancing gender diversity within the organisation.

Diversity can be an important success factor for companies if managed well, and therefore it is one of the governance evaluation criteria in our voting policy. Amundi not only asks that governance bodies comply with the applicable laws in force, but also that companies be proactive on this issue, particularly in countries where there are no regulatory obligations. In developed markets, for example, Amundi requires each gender to represent at least 33% of the Board. In Japan, Amundi has just raised its threshold from one to two people representing the under-represented gender in the Board²⁰. For other Asian and emerging markets, the Board of Directors must include at least one director of the under-represented gender.

Amundi has carried out a number of engagement initiatives around gender equality

In 2023, we engaged with 482 companies on gender diversity. These engagement efforts are bearing fruit: we have seen progress in companies' efforts around strategy development, adoption of quantitative targets and policies, and annual monitoring of key indicators.

Gender diversity engagement case studies

US Food Retailer: Limited female representation in governance bodies, despite mostly female workforce and customers

The food retail sector employs a majority of women on a part-time basis, and its main customers are (still) women. Yet, they remain under-represented in companies’ governance bodies. Including more women in governance bodies would enable them to be more representative of the workforce and to potentially gain a better understanding of their target audience.
Chinese Internet Technology company: attracting and retaining women is still a challenge

This company is a Chinese Internet and game services provider – for them, a diverse workplace can stimulate innovation and new ideas.
South Korean Semiconductor Company: monitoring is key for anticipating and evaluating the success of gender diversity programs

Being able to attract and retain technical talent is critical to the semiconductor industry, where competition for skilled workers is intense. Women represent a still largely untapped talent pool, with their representation often hovering around 20% across companies, especially in technical roles.

Amundi’s position on DEI and Gender Diversity Engagement

Amundi believes in the value of promoting diversity, equity and inclusion as an integral part of responsible investing. We encourage companies to promote gender diversity on corporate boards, in senior management, and more broadly across the workforce.

In our engagement with investee companies across various diversity themes, we seek to strengthen their strategy, management, and disclosure across several key categories of expectations, informed by research studies and global best practices²³. These include:

Amundi’s position on DEI and Gender Diversity Engagement

Assessing the growing DEI backlash in the USA

While DEI engagements improvements are certain, they need to be sustained over the long term, in order to ultimately uproot the highly institutionalised psychological and cultural obstacles. Maintaining this effort over time will in fact be difficult, in a context where a counter-movement is arguing that DEI policies create discrimination.

This counter-movement won in a first phase when the US Supreme Court ruled that racially-conscious admissions programs at colleges were unconstitutional, in June 2023. Since then, several companies have been attacked due to their DEI policies. For example, Pfizer was sued by a membership organization, Do No Harm, as its DEI policy allegedly excluded white and Asian American applicants. The claim was ultimately considered invalid because the plaintiff was unable to identify a single person who was harmed by the company’s policy. However, the wave continued with other companies being attacked in the press and social media, and with boycott calls. That was the case with Disney when it publicly opposed a Republican law passed in Florida forbidding to discuss topics linked to gender identity or sexual orientation in a classroom. Target also faced backlash due to its 2023 LGBTQ Pride Month strategy, suffering substantial financial losses as a result. Its sales dropped by over 5% in the second quarter of 2023, partly due to the controversy, according to the company.

These notable cases were sufficient for many companies to review their DEI policies. Some even decided to step back entirely by erasing diversity criteria from executive bonus plans, such as tractor maker J. Deere, or to eliminate all diversity roles, such as U.S. retailer Tractor Supply.

This DEI backlash started in 2022 and strongly accelerated in the 2023 and 2024 voting seasons along with the anti-ESG resolutions increase in the USA²⁴, a new trend that investors need to watch out for. Indeed, according to our voting data, the number of anti-ESG resolutions increased from 71 in 2023 to 82 in 2023 (+15% from year to year). At the same time, the number of anti-DEI resolutions rose from 1 in 2022 to 4 (x4) in 2023 and to 11 (x3) in 2024, showing that the anti-DEI movement is very recent and has increased rapidly. In 2024, anti-DEI resolutions represent half of the DEI resolutions in the USA. The percentage of these anti-DEI resolutions in the over-all anti-ESG resolutions has also increased: they represented only 6% in 2023 vs 13% in 2024. While we need to acknowledge this anti-DEI trend, it is important to note they are rarely supported by investors²⁵. It remains to be seen whether the anti-DEI trend will hold and gain more support in the USA – and reach Europe or Japan.

There is, however, a positive side to the DEI backlash. Companies proclaiming DEI commitments with no true convictions will be led to drop the objectives they had no plans to reach. Meanwhile, those with a more mature approach to DEI will likely continue working towards their goals. Thus, vague commitments might disappear progressively, and the remaining targets will be more robust, quantified and results-oriented.

Ultimately, companies will need to go back to the roots of DEI policies: rather than being interpreted as a way to give opportunities to the less-represented gender solely because of its minority status, DEI policies should be seen as a way to give access to equal opportunities for all, no matter their gender or background. To address this backlash, companies will need to focus on demonstrating the positive impact that DEI policies can have for everyone and train employees to identify unconscious biases to resist them.

Conclusion: Taking advantage of the growing momentum on gender-smart investing

Despite a political and economic context favorable to the advancement of gender equality over the past century, women are still under-represented in positions of responsibility and on corporate governance bodies in 2024.

Investors have already used a number of tools to narrow this gap. The market for gender-smart financial instruments, such as gender bonds has grown significantly over the last decade. Active engagement with investee companies has also been a powerful tool for change. At Amundi, we have employed our engagement capabilities to encourage gender equality within companies, with concrete results. In 2023, we engaged with 482 companies on this topic to help them take steps to improve efficiency, encourage innovation and thus boost financial results.

We are convinced that diversity brings greater profitability thanks to a better understanding of customer expectations, higher operational performance due to the inclusion of a diversity of perspectives, and a greater capacity to innovate. However, we must also take into account a certain DEI fatigue and remind stakeholders that gender equality is not about promoting one gender over another, but rather about accessing a better talent pool by giving everyone the same opportunity set, regardless of gender.

For the gender investing landscape to truly grow and make a real difference in the life of women and girls, market actors will need to have a deeper understanding of what gender-smart investing means. We are confident that market guidance and initiatives will be key to accompany the growth of the market. In parallel, the availability of investment solutions will also need to expand in order to match investor demand and requirements, including in emerging markets and developing economies.