What you need to know about 'gender lens' investing

Investing with a purpose has never been more popular. So-called impact investments are holding more money than ever, and some 85% of individual investors, and 95% of millennials, are interested in sustainable options, according to a recent report from the Morgan Stanley Institute for Sustainable Investing.

The mission of sustainable funds varies, but typically they market themselves as investments in companies with sound environmental, social and governance (ESG) practices. But a recent report from The Wall Street Journal, which found that 8 of the 10 biggest U.S. sustainable funds are invested in oil and gas companies, makes clear that ethical investing can be difficult when business interests and individual interests clash.

It's not just environmentally focused funds that face this existential problem. CNBC Make It analyzed one so-called socially responsible fund, the Fidelity Women's Leadership Fund (FWOMX), to see how it measures up to its mission, and to illustrate just how complicated impact investing can be.

The Fidelity Women's Leadership Fund is an actively managed equity fund that "invests primarily in companies that prioritize and advance women's leadership," per Fidelity's website. It's marketed as a tool for the capitalist with values.

Nicole Connolly, head of ESG investing at Fidelity Investments, tells CNBC Make It that companies in the Russell 3000 Index, which tracks the performance of the 3,000 largest U.S.-traded stocks, had to meet one of following requirements in order to be considered for inclusion in the women's leadership fund:

1. The company has one woman as a member of the senior management team.
2. It is governed by a board that is at least one-third female.
3. It has policies — related to parental leave, the gender pay gap, schedule flexibility, etc. — aimed at attracting, retaining and promoting women.

Those requirements narrowed down the roster of eligible companies to 700. From there Connolly, looked for companies that had good visibility into revenue growth, have sufficient cash flow and "do responsible things with that cash flow."

The fund, which began trading in May 2019, currently has 112 holdings, including behemoths like Alphabet, Facebook and J.P. Morgan, and smaller companies like Etsy and Ulta.

It also has an expense ratio of 1%, which is significantly higher than, say, an index fund that tracks the whole Russell 3000. While that might seem like a "Pink Tax," it is in line with fees charged by other actively managed funds. There are many options that also hold Microsoft, Apple, Amazon, Facebook and J.P. Morgan just like the women's leadership fund, at lower costs.

Fidelity is hoping that the fund's mission resonates enough with investors that they will overlook the expense ratio to support companies that prioritize gender inclusivity. Connolly says the fund is worth the price because of all of the research Fidelity puts into selecting companies that meet its criteria.

And there are studies that conclude that companies promoting women and diversity initiatives perform better than less-diverse firms, including an October 2019 report by S&P Global. The researchers compared the performance of female and male CEOs and CFOs for companies in the Russell 3000 Index over a 17-year period and found that firms with female CEOs and CFOs had superior stock market performance compared with the market average, and companies with a more gender diverse board of directors were more profitable than firms without diversity. It also found that companies with female CFOs were more profitable than those with male CFOs. Other reports have found similar results.

Conversely, recent research from Harvard Business School that analyzed board composition and financial data from more than 1,600 public U.S. companies between 1998 and 2011 found that the firms appointing women to their boards "see a decline in their market value for two years following the appointment."

If you are interested in the advancement of companies owned or controlled by women, then higher-than-average returns are, presumably, not your primary motivator. You want to support these companies to promote gender equality and women's advancement, not necessarily to outperform the market and get rich.

That leaves two big questions about investing in a fund purporting to promote women's leadership: One, is it worth paying more for a fund that invests in many of the same companies as a standard low-cost index fund? And two, are Apple, Amazon, Facebook and others included in the fund really good for women?

GoDaddy, for example, is included in the fund. Its old ad campaigns were perceived to be so sexist, its male chief executive acknowledged in 2013 that the company needed to improve image, by stopping its salacious ad campaigns and improving the company's working environment. (In 2017, it was named one of the best places to work for women by careers site Comparably.) Lockheed Martin, one of the largest defense companies in the world, is another name included in the fund that raises eyebrows considering women and girls suffer disproportionately during and after war, according to the United Nations. Would conscientious investors be upset to see these companies in a fund focused on women's leadership?

Both check the boxes to be included in Fidelity's fund — the former has women in the C-suite and the latter boasts a female CEO — which are outlined transparently on the fund's page and in its prospectus. (It's also in the name: "Leadership" is an important requirement here.) But as with everything related to personal finances, there aren't definitive answers to those questions, Erika Karp, founder and CEO of Cornerstone Capital Group, tells CNBC Make It.

A women's development fund, narrowly defined, risks confusing or alienating people who care about gender parity more broadly.

"I worry that people don't understand the nuance. If you want to empower women, you need women to have access to education, health care, water, education, to capital," says Karp. "These are issues that are way more complex than who's on the board and who's in leadership."

It's important that tech companies, for example, offer competitive salaries and generous parental leave policies, but they also need to consider the office culture. An apparel company might have a woman CEO, but it still needs to evaluate its supply chain and how women are treated from the bottom up.

At the end of the day, Karp says, it's up to each individual to do their own due diligence on any investment, to read the prospectus and do a deep dive into the companies held in the fund, and decide where to draw the line. Each individual investor needs to make a decision in line with their own values.

There are other funds marketed as "gender lens investing," including the Pax Ellevate Global Women's Leadership Fund and the WOMN ETF, which tracks the Morningstar Women's Empowerment Index. Both have lower expense ratios than Fidelity's, but run into the same existential problems. In April, Morningstar reported that there are five U.S. equity funds that focus on gender diversity, not including Fidelity's fund, which launched in May of this year.

You could also buy stock in individual companies that you believe promote women's leadership and economic empowerment by doing your own research and investing through a brokerage account. You'd have more say in the companies and avoid the 1% management fee, but it would also entail a lot of work and wouldn't guarantee the stock diversity of a professionally managed fund. (CNBC Make It does not advise stock picking as a way to build wealth or as a primary means of investing.) And as Karp notes, every company is flawed in some way, making it a complicated undertaking.

Fidelity has to return value to shareholders, which partly accounts for why those big companies are in the women's leadership fund. The S&P 500 technology sector has risen 40% for the year, well above the S&P 500's 24% climb as a whole. Subpar returns wouldn't help anyone.

"When we look at our tech holdings, or the tech universe in general, we're looking for companies that are really looking to build the pipeline for future female tech talent, and a culture of inclusivity," says Connolly. "These companies, they may not be perfect today, but they're trying to get to a place where women and all underrepresented populations can thrive in the organization."

She adds that 40% of the fund's holdings are companies led by women, which is not typically the case for most funds, and that companies have asked how they can be included in the future, perhaps a harbinger of more inclusive business practices to come.

But the fund also highlights the limits of impact investing. It's complicated to invest your values when it's not always immediately obvious whether certain companies are built on inequality and potentially unfair or exploitative business practices. If you want to build wealth via your investments, you're going to have to make some concessions.

Don't miss: 85% of investors are interested in impact investing—here's how to make your portfolio more sustainable

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