Long reads

We are what we invest in: The importance of gender lens investing

Hamish Monk

Hamish Monk

Reporter, Finextra

What is gender lens investing? How do we advance gender diversity and inclusion in the fintech and renewable energy sectors? Can we accurately measure the impact of gender-smart investment? Answering these questions successfully will have a profoundly positive impact on the global economy.       

At SME Finance Forum’s virtual webinar ‘Gender Lens Investing’, experts gathered to explore the benefits of deploying capital to address gender inequalities, and what should happen next to help boost investment in the area.

While some legislative steps have been taken in the UK recently to address gender inequalities, such as the UK HM Treasury’s Investing in Women Code policy paper – a commitment by financial services firms to improving female entrepreneurs’ access to tools, resources and finance – more can be done. Indeed, “entrepreneurs are the lifeblood of global economy”, as panellist Debbie Watkins – CEO and co-founder of neobank for underbanked women, Lucy – put it.

Also represented on the panel was the global consortium of financial institutions driving women’s wealth creation, Financial Alliance for Women; globally active impact investor, Triodos Bank; and the International Finance Corporation (IFC)’s Gender and Economic Inclusion Group.

Each of these institutions provided a unique perspective on which techniques and practices should be adopted to help promote financing solutions that support women in the professional sphere.

What is gender lens investing?

Gender lens investing is a term that is becoming increasingly common as more investors and financial institutions are adopting the strategy. Simply put, gender lens investing can refer to any investment strategy that uses capital to redress the imbalance between men and women in the workplace.

This is an important mission, and one that is prescribed by the United Nations’ fifth Sustainable Development Goal (SDG), which commits to “achieving gender equality, and empowering all women and girls” around the world.     

Gender equality also has backing from the Group of Seven (G7). In August 2018, development finance institutions (DFIs) from the G7 countries – namely, FinDev Canada, Proparco, German Investment Corporation (DEG), Cassa Depositi e Prestiti, Japan Bank for International Cooperation (JBIC), Japan International Cooperation Agency (JICA), Commonwealth Development Corporation (CDC) and Overseas Private Investment Corporation (OPIC) – launched the “2X Challenge” at the G7 Charlevoix Summit.

Referring to the multiplier effect of investing in women, 2X seeks to advance gender equality through innovative financing, and originally called for the G7, and other DFIs, to mobilize $3 billion for the cause.

At the time of writing, 2X Challenge member institutions have already overshot this target – having committed $4.5 billion to gender-smart investments. As we speak, this capital is being put to work at a global level, in order to boost women’s economic participation.

The 2X Criteria

With new members having joined the group since its launch, 2X recently launched a criteria to “provide a framework for investors globally to identify gender-smart business opportunities along the entire value chain.”

Importantly, this criteria has been integrated into the impact management and measurement framework IRIS+ of the Global Impact Investor Network (GIIN), and has emerged as a global standard.

According to 2X, an investment qualifies as gender-smart if fulfils just one of their following criteria:

  • 51% of the business is owned by women, or it is founded by a woman;
  • 20-30% of women are in senior leadership, or 30% women are on the Board or Investment Committee;
  • 30-50% of the workforce is female and the business demonstrates one “quality” indicator, beyond compliance;
  • The business provides products or services that specifically or disproportionally benefit women; or
  • 30% of the DFI loan proceeds or portfolio companies meet the criteria.  

To supplement this framework, the 2X group – in partnership with American-British law firm, Hogan Lovells –  has produced a legal toolkit to give investors a standardised set of gender lens definitions, principles and legal terms that can be structured into equity and debt transactions.

This gender lens scheme, called Project Aurora, is one instalment in a series of investment toolkits that have emerged recently. Other noteworthy initiatives include the CDC and IFC’s Fund Manager’s Guide to Gender-Smart Investing, which provides investors with guidance on every step of the investment process.

These toolkits are key to fostering rigour and clarity in gender lens investing, and represent a promising developments for gender and diversity efforts globally.

Why should investors use a gender lens?

When asked why – other than for ethical reasons – a venture capitalist (VC) or private equity (PE) firm should use a gender lens when formulating their investment strategies, Lucy CEO, Watkins, said: “Empowering women makes sense for everyone.”

Indeed, the halo effect of gender lens investing is far-reaching, as are the consequences of overlooking it. According to a recent World Bank Group study, countries around the world are currently losing a combined $160 trillion as a result of differences in lifetime earnings between women and men. Driving women’s equality in the workplace would add $12 trillion to annual global GDP, claimed a McKinsey Global Institute report in 2015. This is the same amount of capital as the economies of China and the USA, combined.

By considering the full scope of the business case, companies, and economies-at-large stand to unlock considerable growth opportunities.

Driving female involvement in fintech

The fintech sector was one of several areas experts covered during SME Finance Forum’s virtual webinar. The key question addressed was: How can fintechs profit from the female economy?

According to a recent report from the Financial Alliance for Women, “the female economy is large, fast-growing and underserved – and fintechs are well-positioned to tap into it.” In order to shine a light on this opportunity, and help fintechs tap in to the “multi-trillion-dollar women’s market”, the report surveyed 168 fintechs, 30 investors, and 42 ecosystem stakeholders around the globe – providing an in-depth insight into the sector’s gender equality status.

The crowning achievement of the report is to give six recommendations to help drive female involvement in the fintech sector. These are:

1. Embrace the strong business case for serving women

Fintechs that track key performance indicators by sex show a compelling case for serving the women’s market. Importantly, 64% of fintechs that collect sex-disaggregated usage data found that female customers have similar or higher usage rates than men.

2. Use sex-disaggregated data, not preconceptions, to drive decision-making

While around 80% of fintechs in the study can disaggregate the proportion of their customers that are female, most do not use sex-disaggregated data to inform business decisions. Research reveals that when starting out, fintechs typically focus on early adopters – who are often perceived to be male – in order to quickly grow their user base. As such, by the time most fintechs are well-funded, unless they have conscientiously begun to serve the women’s market, they are caught in a spiral of serving mainly male customers.

3. Take a gender-intelligent approach

Fintechs should move past developing gender-neutral products – or simply changing the interface in order to create a “female friendly” service – if they want to sustainably profit from the female market.

4. Scale up through partnerships

Around 75% of surveyed fintechs have already partnered with one or more financial services provider (FSP). Just 8% of Alliance members, however, are working with fintechs on solutions for the women’s market. Clearly, “there is a need for stronger internal communication between women’s markets and teams working with fintechs inside FSPs”, argues the report.

5. Align with investors

Two-thirds of the VCs surveyed said the fintechs they’ve funded have not created customised products or services for women. Half said that having research to show that women are underserved would encourage them to apply a gender lens when investing.

6. Advocate for an enabling regulatory environment

On average, 40% of fintechs – and 65% of women-focused fintechs – that responded to the survey said regulatory incentives and grants hold the greatest potential to help them serve the women’s market.

Overall, although this report uncovers some concerning gender inequalities within the fintech sector, it successfully provides stakeholders with a robust roadmap to rectify the issue.

Empowering women in renewable energy

Another sector under scrutiny at the webinar was the thriving renewable energy arena.

According to the Fund Manager’s Guide to Gender-Smart Investing, “gender equality is a prerequisite for achieving all other SDGs, and it is among the top ten most effective strategies for global climate action.” Indeed, investment in gender equality – which aligns with the fifth SDG – is relevant across all 17 SDGs, and can supercharge overall ESG performance.

So, to what extent are women underrepresented in this area, and what we can do to change the status quo?

According to the International Renewable Energy Agency, women represent just one third of the renewable energy workforce worldwide. This is a concern, especially for women in geographies like sub-Saharan Africa, where 40 percent of all power generation capacity will come from renewable sources by 2040. Clearly, women are being left behind in this growing sector.

To address this issue, the IFC launched an initiative in October 2019 to increase opportunities for women in renewable energy, called Energy2Equal. Under this scheme, the IFC works with businesses in Sub-Saharan Africa to bridge the gender gap, and facilitate women’s access to jobs and leadership positions within the renewable energy space.

More initiatives like this will need to be launched around the world to ensure women are not left behind in this booming sector.   

The "shecession”: Female entrepreneurs and the pandemic

The case for gender-smart investing, across all sectors, has become even more urgent in the wake of the pandemic, which severely impacted female-led SMEs.

In a previous roundtable organised by the SME Finance Forum, global head of IFC Banking on Women, Jessica Schnabel, pointed out that before the pandemic, the credit gap for women-owned SMEs in emerging markets was $1.5 trillion. Arguably, this is now an optimistic timeframe, with the Covid-19-induced recession serving to widen the global gender gap further still. According to Bank of America (BofA) research, at the current rate of progress, it will take 257 years to close the economic gender gap.

At the roundtable, this gendered economic impact of Covid-19 was referred to by Zar Wardak, vice president and division director of FINCA Impact Finance, as the “shecession”. Indeed, in Q4 2020, 215,000,000 jobs were lost globally, with 60% of those jobs coming from informal sectors. Today, there are around 740 million women working in the informal sector, which often struggles to receive government support.

This is a critical imbalance to address – there is plenty of evidence to show that female entrepreneurs are a key source of growth and value for businesses, investors, financial institutions, and economies. As such, solving the “shecession” is critical to healing the global economy, long-term.

If the pandemic has taught us one thing, it is that we can only overcome global challenges through widespread co-operation. The same will apply to meeting SDG 5.

Measuring the impact

Success, however, means measuring progress. But, as is the case with climate change mitigation, the impact of investment in the area is hard to quantify.

The IFC, for its part, measures the impact of gender lens investment projects through its proprietary Anticipated Impact Measurement and Monitoring (or AIMM) tool. This works by monitoring economy-wide effects through relevant modelling techniques; factoring in sector-specific development gap assessments; marking against a wealth of gap and intensity indicators across AIMM sector frameworks; and considering explicit catalytic or systemic effects on markets, in order to expand the focus on a project’s direct impact.

The IFC uses all information captured during these projects to further build-out its data inventory, which is used to improve the structure of similar future projects. This methodology is successful because it places development impact at the heart of the project’s success.

The CDC, meanwhile, uses 2X Challenge Indicators, in Alignment with IRIS+, to measure the impact of gender-focussed investments.

Clearly, there is demand for a universal framework that produces a standardised score of any given project’s gender and diversity-related impact.

Securing the growth of gender lens investing

Clearly, gender lens investment is gaining traction – the benefits are hard to ignore. The next step is to mainstream the effort, by driving awareness, supporting initiatives such as the 2X Challenge, and backing regulations like the UK HM Treasury’s Investing in Women Code policy paper.

So, how can this be done? Unfortunately, the consensus among the speakers at SME Finance Forum’s virtual webinar was that there is no silver bullet.

They did, however, provide three concrete pointers.  

1. Do not be afraid to start. While there is no single means to tackle the economic gender gap, panellists stressed the importance of VCs, PEs, and businesses in general, to start testing the water and asking questions. We are all still learning.

2. Be wary of basing gender-focused investment decisions on pre-held assumptions – competence is more valuable than confidence. Providing an investment strategy is continually optimised in line with its real-world impact, we can expect promising results. Indeed, data collection is the lifeblood of the effort.

3. As demonstrated by the pandemic, collaboration is key to overcoming global challenges. Meeting SDG 5 will be no different. Addressing this particular issue, however, necessitates collaboration on all levels – from thought-leaders, such as the IFC and CDC, to legislators like the UK’s HM Treasury. As ever, involving women in these conversations is crucial.

The SME Finance Forum’s ‘Gender Lens Investing’ mission statement is thought-provoking and significant. After all, we are what we invest in.

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