ESG and Sustainability Insights

Is female board inclusion driving better performance?

4 minute read time

In this feature, markets strategist Alvaro Vivanco explores why female board representation is positively linked to environmental sustainability and stock returns – and what it means for businesses looking to tackle ESG risks.

Key takeaways:

  • Diversity & inclusion is being embraced at different speeds globally: there are large divergences between emerging and developed market countries as well as sectors.
  • Companies with more female board representation were also more environmentally sustainable: especially when it comes to reducing emissions or switching to renewable energy sources.
  • Women may be driving better environmental, social and governance (ESG) outcomes: though our analysis can’t conclusively say, external surveys show that women are on average stronger proponents of tackling climate change and emissions reduction through corporate strategy.
  • Female board participation is also linked with better stock performance – at least in the US: this could be down to investors’ greater focus on corporate sustainability indicators.

Attention to environmental, social and governance (ESG) issues has grown in the run up to COP 26 later this year. We are particularly interested in understanding the relationship between ESG factors like carbon intensity or governance ratings and financial returns, both as a way of showing how ESG affects the bottom line and to help improve the tools we use to understand ESG risk.

But, does addressing one ESG risk make it likelier that businesses can effectively tackle others? That’s exactly what we explore in this article – specifically, whether more diversity & inclusion leads to better environmental sustainability. We started by examining the link between the proportion of those who identify as women on corporate boards and various measures of companies’ environmental performance. And in keeping with previous work, we also looked at whether there’s a correlation between female representation on boards and companies’ share price performance.

Corporate board composition is changing at uneven speeds across regions and sectors

We first need to consider what global corporate boards actually look like. To do so, we use the MSCI ACWI index, which consists of around 2,900 companies from across developed and emerging market countries.

We find that the average proportion of women on boards in recent years has been just 23%, globally, and that this proportion is only rising slowly – from 21% in 2014 to 24% in 2019. There’s a lot of variation, however, with the proportion at individual firms ranging from 0% to around 65%. Overall, European companies tend to have the highest proportion of female board members, while firms in emerging markets have much lower female representation on their boards on average.

And although corporate nationality is by far the biggest determinant, there are some significant differences between sectors, with financials, utilities and health care ranking much higher in terms of board diversity than technology and real estate companies.

Companies with more female board representation are more environmentally sustainable

To explore whether there’s a link between female representation on corporate boards and environmental performance globally, we looked at four indicators of long-term sustainability:

A. Whether the company's three-year average energy consumption intensity is falling at a rate of at least 5% over the period, increasing at minimum at the same rate, or has been stable over the period. 

B. Whether the company has programmes in place to reduce its carbon emissions. 

C. Whether the company’s three-year average carbon emissions intensity has been falling at a rate of at least 5% over the period, increasing at minimum at the same rate, or has been stable over the period 

D. Whether the company uses energy from renewable sources.

We then split the companies in our universe into five buckets based on the share of females on their board and plot their performance in each of these categories in the following chart.

Pink is the new green: greater female board representation appears strongly linked with better environmental sustainability*

Sources: MSCI, NatWest Markets. *The closer to 1 on the vertical axis, the higher the correlation between female board representation and the environmental sustainability factor being considered. Each coloured bar represents a percentage of company boards that are people who identify as women

It’s clear from the chart above that companies with greater female representation on average score significantly higher on these environmental measures than those with less representation.

This is especially the case for the existence of programmes to reduce emissions and the use of alternative energy sources (indicators B and D above). For example, while only 44% of companies with under 10% female board representation use renewable resources, 73% of companies with at least 40% do so.

We can also see that there seems to be a significant improvement in all four indicators when boards cross the 20% female threshold before plateauing once 40% is reached. This suggests there could be a different board dynamic once women account for more than a small minority, which is consistent with previous studies that show a change in outcomes once women account for a third or more of a board.

Are women driving better corporate ESG standards?

So, what’s going on here? This correlation between gender diversity and various measures of environmental sustainability appears to apply to other metrics, and several hypotheses about the forces driving this have been suggested.

For example, PwC’s corporate director survey found that female board directors of large companies are more likely to regard ESG issues as important than their male counterparts. According to that survey, 60% report ESG as being tied to company strategy, compared with just 46% of men, while 79% of female directors believe that climate change should be taken into account when shaping corporate strategy, compared with just 62% of male directors.

We’re cautious about trying to establish causality from our study given the limited timeframe it covers. It could be that the relationship is being driven by factors that we did not consider (or that greater environmental sustainability actually increases female board participation). But the alignment of these ESG factors is certainly notable as other companies consider the positive benefits of greater diversity and inclusion.

The link between female representation and stock returns could be driven by investors

Many studies have examined the relationship between female board participation and equity performance, with largely inconclusive results. But with society’s – and investors’ – preferences evolving in the wake of the pandemic, we decided to examine whether there might now be a stronger link.

With this in mind, we looked at the total equity returns of US companies against the share female board representation dating back to May 2019 (the region and most recent year with enough data available), split into the same buckets as before. As the chart below shows, US firms with at least 30% female board representation have outperformed those with a lower proportion between May 2019-2021. 

There is a positive link between stock performance and the proportion of women on boards*

Sources: Bloomberg, MSCI, NatWest Markets. *The vertical axis reflects average stock performance; a higher number reflects better stock performance. Each bar represents a percentage of company boards that are people who identify as women.

This may be an indication of investors’ increasing focus on corporate sustainability indicators over the past two years, though more analysis would be required to confirm whether that’s the case.

The pressing need for corporate sustainability

Although more work is required to determine any direct causality, it’s clear that overall, firms with higher levels of female leadership tend to adopt better environmental practices. In the US, and possibly elsewhere, they’ve also produced above-average equity returns in recent years.

Finally, we think our analysis shows there are clear benefits for companies – and for investors and society – to adopt more sustainable practices, which includes prioritising diversity and inclusion.

To find out more about how ESG risks could affect your business, get in touch with your NatWest Corporates & Institutions representative 

By Alvaro Vivanco

Head of Emerging Markets Strategy