Conscious and unconscious biases against LGBTQ+ executives lead to stockmarket participants and investors failing to appreciate the financial performance and potential of LGBT-led firms, according to a report co-authored by academics from Northumbria University.
As a result, companies are substantially underestimated and undervalued on the stockmarkets in what is dubbed a ‘rainbow ceiling’ phenomenon in the report – LGBT CEOs and stock returns: Diagnosing rainbow ceilings and cliffs. This discrimination-driven effect, the authors noted, is leading to stocks of companies with LGBTQ+ leaders significantly outperforming the market by 0.69% to 1.08% per month – representing a “hidden gem” of an investment opportunity, said research lead Dr Savva Shanaev.
“What’s powerful about this is that you could see an investment do well, and you can also do good at the same time. That’s the golden grail of socially responsible investing, and it’s very rare to find.”
The findings of the study come as no surprise to Matt Cameron, CEO of global LGBTQ+ financial and professional services membership community LGBT Great, who told ESG Clarity the investment industry “is still very conservative overall”.
“Most of the leadership are probably from Gen X or older, and probably come from backgrounds and upbringings where the notion of being LGBTQ+ either wasn’t a thing, or the stigma was negative. That obviously has a huge impact in terms of blind spots and awareness around these issues.”
Although it is well known that organisations that have higher levels of LGBTQ+ inclusivity and equality produce higher levels of alpha, the more interesting question for Cameron is: why?
“Generally, organisations that are led by underrepresented communities tend to have a more diverse workforce and leadership team, who therefore bring a diversity of backgrounds, perspectives and thinking. Those three things together, and the ability to bring a level of cohesion to them, means that these organisations exhibit high levels of innovation, which leads to that outperformance the paper highlighted.”
LGBTQ+ visibility
As part of the study, the authors collected data to identify all listed companies led by openly LGBTQ+ CEOs from 1 January 2000 to 31 December 2021 using corporate websites, reputable news sources, CEO media interviews and more.
Through this research, they found only 26 sample CEOs. Even then, 19 were openly gay men, with only one openly bisexual man, two openly lesbian women and four openly transgender women. According to the authors, this arguably suggests that the level of informal discrimination differs with regards to various queer identities in the corporate environment, and that openly gay men might be enjoying relatively higher representation than, for example, lesbian women or bisexuals.
This is something that Cameron is all too familiar with: “There are very few open, visible LGBTQ+ people that exist in the C-suite or on company boards, which the report highlights. But even then, from my experience, those people are highly likely to be white, cis and gay men.”
A lot of talent in marginalised queer identity groups, Cameron suggested, may exist on the lower rungs of the corporate ladder, but there’s a bottleneck when it comes to promoting that talent to middle management level.
“People from underrepresented communities lack the same level of confidence and career skills to push themselves forward in organisations. Women, for example, don’t ask for a pay rise or push for promotion anywhere near as much as their male counterparts.”
Differences also exist between firms of different sizes. Big investment firms generally have lots of resources, tools and space for separate employee networks, whereas smaller organisations tend to be more intersectionally led. But, according to Cameron, it’s those bigger organisations that are taking the foot off the gas in terms of LGBTQ+ activity externally. The more in the spotlight they are, the bigger the perceived reputational risk, whereas some of the smaller boutique organisations can be a bit bolder and braver in expressing their values.
Increasing awareness and education
In 2021, LGBTGreat conducting its own study, which reflected the Northumbria University findings. Alongside a lack of understanding about the Alpha opportunity in LGBTQ+ equal businesses, it also found a lack of knowledge around LGBTQ+ identities. But Cameron asserts that, in supporting learning on the subject, the investment industry “is generally like pushing on an open door”.
“The interesting conversations I’ve been having recently have been around whether investment firms have LGBTQ+ focused funds, products and services. A number of years ago, when I was looking to set up a pension, I thought it would be good to set one up with an organisation that’s invested in LGBTQ+ inclusive companies, and nobody – I mean nobody – could tell me where to go. So, there’s definitely a market opportunity there.
“But then I think back to Credit Suisse, who launched an LGBTQ+ focused fund in 2013, and it failed because it didn’t attract enough alpha investment. So, there’s this complexity now around whether we have something that is super niche, or whether we should apply LGBTQ+ inclusivity into a framework that speaks more broadly. If we look at some of the lenses that are already being applied, such as gender lens investing, actually a lens for LGBTQ+ inclusive investing isn’t all that different. But the data availability is making it much harder.
“We have a benchmarking tool called the iiBT – the inclusion index benchmarking tool – for companies to review and analyse inclusivity in their business. So, again, it’s about looking for the signs and signals that organisations are committed by making the data available to easy to access for investors. Advocacy and action around increasing awareness and education in the industry is key, because that can lead to more conscious decision making.”
Political polarisation
As to the concept of a ‘rainbow ceiling’, Cameron feels it probably needs further testing.
“In my experience, there are a lot of people that just don’t care and only want to get the best bang for their buck. I’m pretty sure that if you let a typical Donald Trump supporter decide between making $100m or $70m, the first thing they’ll be looking at is the alpha rather than whether that $100m was made by a company with an LGBTQ+ CEO.”
That said, Cameron does concede there is a reluctance from some investors around applying an LGBTQ+ lens to their ESG strategies. Despite predicting that some organisations will move to start incorporating LGBTQ+ ESG criteria into their buying and investment decisions in 2024, business leaders in the US, he explains, are having a hard time in Republican states, where there is a clash between traditional conservative values and support for LGBTQ+ inclusion. Both big and small investment companies “have been frightened to do or say anything around LGBTQ+ issues for fear of being cancelled or subject to a backlash”.
Last year, for example, Budweiser was the subject of a boycott by conservatives in the US because TikTok personality Dylan Mulvaney, a transgender woman, featured their Bud Light product in a video on her Instagram account. Subsequently, the following month, parent company Anheuser-Busch InBev’s stock price fell 20%, enough for it to be classified as a bear stock by Forbes.
“Some firms are talking to investors to try to eliminate the fears and concerns around applying ESG principles into their investment process,” reveals Cameron.
“But what is quite stark is that huge spectrum of polarisation, from people who are fully on board with addressing LGBTQ+ equality and issues, to those on the opposite end who are very conservative. It’s interesting how the political pressures are impacting what investment leaders are thinking and doing.”
Dr Shanaev, meanwhile, said more awareness of the undervaluing of LGBTQ+-led stocks will eventually see the income-boosting effect of discrimination vanish as the market levels out.
“If there is a flow of capital to these stocks in light of this research, the values will increase, and the discrimination effect will eventually vanish. But that’s no bad thing, because ultimately the objective is to prove to the market that companies that are led by the LGBTQ+ community are, in essence, no different to any other.”
