While gender lens investing continues to grow, analyses of gender identity, gender expression, and sexual orientation are not common in impact or traditional investing. Criterion Institute, in partnership with Dreilinden gGmbH, spent a year researching how to build an investing practice that addresses issues faced by lesbian, gay, bisexual, transgender, queer, and intersex (LGBTQI) individuals. In a recently published report, we examine why such a lens can help all investors, regardless of intent or asset class, to uncover hidden opportunities.
There are, of course, many reasons why investors should consider the rights and needs of LGBTQI populations as part of their analysis. In addition to the moral imperative of addressing all forms of gender-based oppression, incorporating an LGBTQI analysis can reveal opportunities and diversify investment pipelines for a range of investors.
Most LGBTQI investing activity to date has taken place in public markets. Organizations like Trillium Asset Management, LGBT Capital, Dreilinden gGmbH, and Cornerstone Capital Group have focused on influencing companies to build more inclusive policies and protections for all employees. Firms including Calvert Investments and NorthStar Asset Management are integrating LGBTQI-specific considerations into broader impact investment strategies. And a growing number of venture investors, including Pipeline Angels and Backstage Capital, are looking for overlooked opportunities by investing specifically in LGBTQI entrepreneurs.
However, there are opportunities to expand an LGBTQI lens beyond public equities strategies and direct investments in LGBTQI-led enterprises. For gender lens investors—and all impact investors—moving beyond a binary understanding of gender to value how gendered experiences impact how people move through the world will lead to better analysis and better financial and impact outcomes. And understanding how bias and normative assumptions about gender and sexual identity emerge in financial analysis are crucial to identifying, mitigating, and adequately pricing risk in all investments.
LGBTQI individuals still face significant—in some cases rising—inequities and discrimination around the world. We have identified two main ways in which an LGBTQI lens can illuminate hidden investment risks:
1. LGBTQI oppression is a political and market risk
How countries treat vulnerable populations is linked to their political and economic performance. Research shows that violence against women is a better predictor of future state stability than traditional measures such as wealth and the strength of institutions. A growing body of work shows that discrimination against LGBTQI populations is correlated with worse economic outcomes. These suggest that patterns of violence and other forms of discrimination are more material to analysis of political and market risk than conventional investing wisdom would have us think.
For analysts, looking at patterns and trends in LGBTQI oppression in a country could be an important component of analyzing the future stability of the state. This could also illuminate where there might be unseen risks to labor supply, consumer demand, and overall economic growth in target markets.
2. Shifts in cultural patterns pose operational, regulatory, reputational, and market risks
Understanding how culture is shifting around gender norms is an undervalued component of investment risk. Culture change is not commonly perceived as relevant to investment analysis, but it affects how companies are perceived—and how they perform. As a wider range of gender identities, gender expressions, and sexual orientations have become accepted and commonplace in certain parts of the world, discrimination against them becomes less acceptable.
Operational risk: Companies that do not adapt to cultural changes will face operational costs, such as trouble attracting and recruiting talent and losses in productivity from staff who are not able to feel safe or thrive. Organizations such as Open for Business have consistently shown that companies that have LGBTQI-inclusive policies perform better. This aligns with a growing body of research showing that seemingly intangible factors such as diversity, safety, and inclusivity are integral to optimizing business performance.
Regulatory risk: As culture changes, so do laws and regulations. Companies that are poorly positioned to adapt to changing laws face regulatory risks. A recent example is the US Supreme Court’s June 2020 ruling that existing laws barring discrimination on the basis of sex include LGBTQI workers. This outcome, unthinkable even a decade ago, is widely accepted to have been brought about at least in part by activists and advocates in the successful US pro-LGBTQI social movement.
Reputational risk: Culture change can lead to changes in behavior, but it also leads to changes in perceptions of what behaviors are and are not acceptable. This can have devastating consequences for companies and investors who are not attuned to such shifts. The #MeToo movement is one of the best recent illustrations of this risk. Companies where abuse was revealed suffered declines in stock value or, in high-profile cases such as the Weinstein Company, went under altogether, surprising many investors. The surprise, however, was less about the behaviors themselves—which have been happening for a long time—but in culture shifts that meant those behaviors were no longer tolerated.
The case of the fast-food chain Chick-fil-A illustrates that this applies to LGBTQI issues as well. Chick-fil-A’s CEO has expressed opposition to same-sex marriage and its US-based locations became an increasing target of protests. When it attempted to expand to the UK, its first franchise was protested by LGBTQI groups and closed within 8 days.
Market risk: An inability to assess and adapt to culture change can also manifest as a market risk. Companies and investors who do not understand their target markets can fall short with their products, services, and marketing. Fashion is perhaps the most obvious example of how tangible changes in gender expression and sexual orientation are to business outcomes, with smart companies catering to changes in how people are choosing to dress. Reputational risk is also closely linked to market risk, as culture changes in the target market impact the calculation of what does and does not constitute reputational risk.
Building a practice in which an LGBTQI lens is consistently integrated into investment decision making will require coordination among many groups. Philanthropists, governments, and NGOs, among others, can play a role in building a field—for example, investing in research so that financial products and strategies are built on good data. And those who already work on LGBTQI issues have the opportunity to think expansively about how engaging finance can help them achieve their goals.
Joy Anderson is the president and founder of Criterion Institute and a leader on the intersection of finance, gender, and social change. Tia Subramanian is the director of Criterion Institute’s Gender-Based Violence Program and works on a variety of gender and finance issues.