Diversity and inclusion (D&I) is set to become an established part of institutional investment criteria. A global mind shift is underway, following a pattern seen before in the financial industry. After much press and attention, environmental, social, and governance (ESG) factors became known investment criteria for many institutions. While D&I is still getting comparatively less press than ESG, it’s headed in the same direction. As more institutions embrace “values based investing,” investors are looking beyond ESG to better understand how firms’ focus on initiatives, such as D&I, should impact investment decisions. Diversity is no longer viewed solely as a human resources initiative.
This concept is explored in a new report by financial industry think tank New Financial. Diversity From An Investor's Perspective examines the importance forward-thinking pension funds, insurers, and sovereign wealth funds are placing on diversity as a key driver of business success. A growing set of asset owners say that promoting D&I and creating specific initiatives to drive it, helps them improve decision-making, attract and retain talent, innovate and compete, and ultimately enhance financial performance.
Moving Up the Agenda
While there is a way to go before diversity becomes fully entrenched in the investment industry, there's a growing body of evidence to suggest it's moving up the corporate agenda. Of the 100 asset owners surveyed, New Financial found that 74% mention diversity in their annual reports, 45% articulate why diversity is important, and 13% use it as a theme for portfolio allocation. Diversity focused questions are also coming up more frequently in requests for proposals and investment consultants are including diversity criteria.
The New York City Retirement System currently allocates $12 billion of its $175 billion assets to investment firms and businesses owned by women and people of ethnic minority backgrounds. This allocation has risen by 25% in just four years, in line with its strongly held belief that diversity is a fiduciary duty. Meanwhile, Swedish asset manager AP2 has invested $30 million in a fund to increase access to capital for female entrepreneurs and promote lending in emerging economies, aligning its investment approach with the United Nations Sustainable Development Goals.
Improving Diversity Internally
Asset owners have also begun to tackle diversity within their own firms. 33% have introduced initiatives to attract, retain, and promote diverse staff. In 2017, the UK Environmental Agency Pension Fund not only published the gender ratio of its pension function, but also revealed the proportion of ethnic minority staff.
More than one-fifth (21%) of those surveyed have set diversity targets for their organization. Canada's AIMCo, for example, has a target of at least 30% female representation among its directors.
Winning Over External Managers
The report found that one of the biggest challenges for asset owners is getting external investment managers on board with embracing diversity. There is resistance in the hedge fund and private equity world, where female representation on executive committees averages less than 10%. Some asset owners are tackling this head-on by asking focused diversity questions during manager selection. The Joseph Rowntree Charitable Trust in the UK recently set diversity targets for its investment managers, which include conducting a gender-blind pay analysis for analysts and fund managers, and ensuring bias-free selection policies.
Reaching a Wider Audience
Asset owners who believe in diversity will have to work hard to convince the cynics, but it's clear the diversity message is reaching an ever-growing and more receptive audience. 42% of asset owners said they are addressing diversity internally. Jean-Marc Crepin, Partner and Chair of the Investor Services and Systems Diversity and Inclusion Council at Brown Brothers Harriman, who co-sponsored the New Financial research, said the report confirms diversity and inclusion are front and center of the business agenda.
“Successful firms genuinely value cognitive diversity," Crepin said. "They are embedding diversity and inclusion as essential values of the firm and as key attributes of their leaders. And they are providing constructive and positive experiences to eliminate all forms of unconscious bias."
Read the full survey report Diversity From An Investor's Perspective for more information on how firms are making diversity and inclusion part of their corporate culture and investment focus:
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