Supported by ISS ESG
When it comes to diversity and inclusion, asset owners are leaning into “walk the talk.”
After years of pressuring corporations to address issues of gender and racial inequity on their boards and in their ranks, investors are increasingly putting that same energy into pushing asset managers to address equity within their firms.
The move comes as issues of diversity, equity and inclusion, or DEI, increasingly take center stage for businesses and society at large. Investors’ motivations go beyond a desire to “do good” – the benefits of focusing on DEI are supported by plenty of evidence that diverse companies make for better investments.
A growing number of studies show “that higher gender diversity in corporate boards of directors or other high ranking corporate positions is linked to better market performance and higher financial quality,” ISS ESG, the responsible investment arm of Institutional Shareholder Services, says in a recent report. The same applies to ethnic diversity, ISS ESG says.
The number of new female or ethnically diverse directors were markedly higher in 2017 and 2018, ISS ESG says in the report. “And in 2019, non-white male directors earned a majority of new appointments in the US for the first time.” The trend has “continued and accelerated” this year, with 70% of new directorships “being filled by women or ethnic minorities” as of this fall.
Regulators are helping ensure this will continue. California, for instance, has a new rule that says that public companies headquartered in the state must have a certain number of women on their boards of directors.
All this is good news for institutional investors, who have been examining diversity and inclusion at their asset managers as part of their due diligence process for the past few years.
But as issues of inequities came into sharper focus with the Covid-19 pandemic and the protests sparked by the killing of George Floyd in May 2020, investors are now expressing a new urgency to address DEI issues.
“Asset owners and asset managers are being much more thoughtful around how these issues manifest not only in their portfolios but also in terms of their organizations, and they are more open to having conversations about DEI,” said Tamara Larsen, an executive director focused on mission-driven investing at Agility, a provider of outsourced investing services that has over $15 billion of assets under management.
Agility uses a survey to assess policies and practices at firms to shed a light not only on diversity of ownership and leadership, but also on their strategy for “transitioning talented women and people of color from the junior ranks to those seats of power,” said Larsen in an interview.
The use of questionnaires in investors’ due diligence is fairly common, but the survey process is getting more specialized. Agility recently contracted with Lenox Park Solutions to expand and refine the questions it asks of asset managers, and to assess and organize those findings.
Ultimately, investors hope that an industry standard for diversity and inclusion due diligence will emerge. Armed with a uniform data set, asset owners and allocators could compare and analyze managers’ approach to equity.
“All of us want to get the answers…we want similar information,” said Aubre Clemens, global head of sustainable research at J.P. Morgan Private Bank, which also uses the services of Lenox Park.
“We are early enough [on DEI] that we are now at the place where we can be creating that process” and define what questions to ask and create a common language to evaluate a firm’s practices and policies, she added
Allocating money to asset management firms owned by women and people of color has been an obvious way for investors to address inequity, but minority-owned funds are a small fraction of the market: According to an analysis of fund ownership by the Knight Foundation, only 1.4% of the $82 trillion of assets under management in the U.S. is managed by diverse-owned firms as of September.
Algo to the Rescue
But the path to inclusive asset allocation and management is paved with algorithms. Lenox Park developed technology to measure and compare DEI within asset managers and their funds, providing insight into where changes are needed.
Lenox Park collects data on the gender and ethnicity of a firm’s ownership, leadership and general workforce, giving it an “absolute score and also a relative score, which benchmarks an institution’s scores versus their peers in the industry,” said COO Amber Kizilbash. “Our clients can look at the analytics reporting and decide which metric they want to make the most progress on.”
Some asset owners are using a model devised by the Institutional Limited Partners Association (ILPA), which includes a questionnaire and metrics to help investors assess private equity managers during due diligence. The organization has developed a framework for the continuous monitoring of a firm’s progress in its diversity, equity and inclusion.
Without losing sight of their duty to invest wisely, fund allocators and asset owners said that it will take some perseverance and focus to promote more diversity and inclusion in the industry.
“We want to be very intentional to ensure we are including diverse managers in our search process, as well as consideration of the investment teams, and how diverse they are,” Clemens, of J.P. Morgan said.
In general, surveys have found that around 65% of investing clients feel it is important to them to assess diversity and inclusion when picking a manager, but only around 25% actually ask those questions as part of the due diligence process, she said.
“That’s where we need to start seeing change, and that’s where we can have an impact,” Clemens said.