As investors hold companies to account on diversity, asset managers are exploring how to improve ethnic and racial minority representation.
The Black Lives Matter (BLM) movement, which exploded during the summer of 2020, propelled issues of racial and ethnic inequality to the fore, following the brutal deaths of George Floyd (46), Breonna Taylor (26) and Ahmaud Arbery (25). The deaths of these three US civilians proved to be the catalyst for change, following decades of prejudice and discrimination.
As the legal and political ramifications continue, businesses globally have been inspired to look more closely at their own workplace ecosystems, often noting a distinct lack of racial and ethnic diversity within their workforces. This is true of the asset management industry, which continues to be dominated by one singular demographic: straight white men.
“The short answer is that the asset management industry is not very ethnically diverse,” says Nimisha Srivastava, Head of Global Credit at investment consultant Willis Towers Watson (WTW).
Asset managers and asset owners are increasingly focused on this topic when assessing corporates, demanding transparency of diversity-related metrics and engaging more directly with corporate boards.
According to its latest engagement report, in 2020 Legal & General Investment Management (LGIM) engaged with 44 S&P 500 firms and 35 FTSE 100 companies whose board membership “showed a total lack of ethnic diversity”. From 2022, the asset manager will vote against the chair of the board or nomination committee if there is still no ethnic diversity at board level.
This is in line with the requirements of the UK’s Parker Review, which expects FTSE 100 companies to appoint at least one ethnically diverse board member by the end of this year.
To truly drive change in the investee companies, asset managers must also address ethnic and racial diversity internally.
Prior to BLM, just 33% of UK asset management firms were placing explicit emphasis on ethnic diversity and inclusion in their recruitment processes, according to The Investment Association (IA) ‘Ethnicity in Investment Management’ report.
“Our databases suggest 10-20% of investment teams can be considered ethnically diverse,” Srivastava says. However, there are risks in categorising all minority groups together.
“It would be best practice to look more specifically at racial and ethnic categories, because some groups are more underrepresented in the asset management industry than others,” says Peyun Kok, Director of ESG at the ACA Compliance Group.
“In the US, Black and Latinx groups are particularly underrepresented, whereas Asian groups are less so,” she says.
If they wish to bring about wider change in social outcomes, asset managers must now undertake a vital journey. This will involve tackling unconscious (or conscious) biases, proactively diversifying the talent pool, generating more qualitative analysis to inform the workplace environment and setting clear targets to better utilise and retain diverse talent.
“Firms have recognised the importance of listening and speaking up on societal matters previously deemed too political,” the IA said.
Responsibility for recruitment
A key way in which to diversify a firm’s workforce is to restructure the hiring process, making sure candidates come from wide-ranging socio-economic, educational and ethnic backgrounds.
The IA report noted that 37% of firms surveyed identified sourcing and recruiting talent to be one of the biggest challenges when trying to increase the representation of professionals from ethnic minority backgrounds.
However, there is a reluctance from those in leadership positions – such as the portfolio managers – to involve themselves in hiring, experts tell ESG Investor. The responsibility is instead outsourced to HR.
“We have found that portfolio managers, who are so sophisticated in their investment thinking, don’t apply any of their knowledge to the recruitment process, instead leaving it to HR,” Srivastava says.
Bigger firms may also have the budget to appoint a chief diversity officer. While this is an important role which certainly allows for more focus to be placed in diversity-related issues, it can reduce the accountability of the team lead or portfolio manager who will be managing the new recruit, she points out.
“I don’t think team heads or portfolio managers should be forced to have specific box-ticking diversity targets necessarily, but they should provide more specific information around why each member of their team was selected, which will ascertain they are more involved in the hiring process, and can be a way of making them feel more accountable,” Srivastava adds.
Entry-level recruitment versus c-suite representation
A common complaint from asset managers looking to diversify their workforces is that talent pools aren’t offering a diverse array of candidates.
“We’ve often had pushback from managers that say they just don’t see diverse talent, or are struggling to find it,” Srivastava says.
However, initiatives and programmes are in place to help candidates from less-represented groups find roles in the asset management industry, such as Investment20/20. Of its current pool of trainees, 49% represent ethnic minorities.
The IA report noted that asset management firms can access more diverse talent by working with charities or organisations that are seeking to provide career opportunities to a wider cohort of young people. According to their survey, 96% of firms are “already actively engaged and supporting at least one charity or organisation”.
However, it’s also important to see ethnic and racial diversity at the c-suite and board level.
A 2017 US-focused asset management report published by the Money Management Institute and FundFire showed that the percentage of white staff only dips below an 80% average in less senior roles, thus highlighting that, while there may be more diverse representation in the lower echelons, this isn’t reflected in senior management.
“Diversity gaps are the largest at the executive committee level, where 88% of professionals in these positions […] are white,” the report said.
This has proven to be a more prevalent problem within smaller asset management firms, with nearly 97% of US-based senior distribution professionals at small managers identifying as white, the report noted.
“If owners or leaders of a firm aren’t diverse themselves, then it’s going to be more challenging to prove that they are prioritising ethnic and racial diversity in the firm at all levels,” Srivastava adds.
“One thing [WTW has] tried to point out to managers is that, if you’re waiting for an opening in your team to then recruit for diverse talent, then you’re already too late. You need to be more proactive about finding and nurturing diverse talent in the industry,” she emphasises.
Atmosphere of inclusion
Culture is critical if asset managers want diverse talent to stay for the longer term. “You can’t sustain diversity without having the inclusion piece,” says Kok.
This means adopting inclusivity in the broadest sense, ensuring all employees are benefiting from a workplace culture that embraces ethnic and racial diversity beyond meeting a quota through a sporadic recruitment drive.
“People aren’t going to stick around if they don’t feel that their contributions to the firm hold value,” Kok points out.
Smaller firms, that often see their diverse talent poached by larger firms, need to build a recruitment plan that supports workplace retention, says Jessica Bonsall, Director of ESG at ACA Compliance Group. For example, giving individuals more ownership of individual projects or being more flexible with their working policies.
“But it’s difficult for teams to even think about building a plan that supports workplace retention if the firm hasn’t yet fostered an open floor policy for engaging in conversations around race and ethnicity in the first place,” Bonsall notes.
This means diversity and inclusion needs to be valued by all, perhaps requiring education on issues such as unconscious bias.
“If you have managed to improve your recruitment of diverse talent, then firms need to ensure that all teams members feel their diverse perspectives are valued and that they can be successful and thrive in that workplace,” she says.
Backing up promises with proof
Diversity in the asset management industry can’t be improved without diversity-related data, argues Rebecca Lewis, Managing Partner of investment management firm Arisaig Partners. The data needs to show that there is ethnic representation at all levels through recruitment to promotions and c-suite level appointments.
“Firms should publicly disclose commitments, policies and initiatives, as well as measuring and reporting progress regularly. You can’t manage what you aren’t measuring,” she says.
According to the IA, 75% of firms currently collect quantitative data on the protected characteristics of their workforce, such as ethnicity. However, legal data protection issues prevent full public disclosures, the report noted, “with only a handful of firms currently obtaining sufficient data to draw meaningful conclusions”.
This was also highlighted in the IA’s 2019 ‘Black Voices’ report, which focused specifically on the experiences of black professionals in the asset management industry.
Concerns around diversity-related data prompted the launch of the IA’s Diversity Data Working Group (DDWG) in 2020, which gives members the opportunity to share their own experiences in this area, with plans to publish a practical guide by summer 2021. The guide aims to help members successfully capture and utilise diversity-related data in order to drive meaningful change.
For investors, a lack of data equates to a lack of visibility. Instead of waiting for the data to become available, asset owners need to engage with asset managers and pull together more qualitative findings, Srivastava says.
“If asset owners are doing the outreach and letting asset managers know that ethnic diversity is important to them by setting specific targets of their own, then that puts more onus on the asset manager to prioritise diversity,” she adds.
Diversity of thought
Increased diversity in investment teams certainly doesn’t hurt returns, WTW research has found. Quite the reverse, in fact. Analysing over 3,000 products across a number of asset classes (including benchmark-relative returns, tracking error and diversity), WTW noted that investment teams with high levels of diversity, particularly ethnic diversity, “tend to generate better excess returns”.
“More diverse teams outperform by around 20 basis points (bps),” Srivastava notes, pointing out this is not insignificant for a traditional equity or fixed income strategy with a target of outperforming an index by 1%.
“Every edge matters to a fund manager, and it’s definitely a finding we think has the ability to move the needle,” she says.
Diverse teams allow for more ‘diversity of thought’, also known as ‘cognitive diversity’, meaning that multiple, varied perspectives and experiences within a group gives a team the increased capability to understand a wider variety of global markets and investment trends.
Cognitive diversity can make teams up to 66% more productive, according to executive search firm River Partnership’s ‘Diversity in Asset Management’ report. The firm warned that “building this cognitive diversity into your leadership teams and your organisations is a challenging long-term process”, but a rewarding one.
Accelerating pace of change
Improving ethnic and racial diversity within the asset management industry shouldn’t begin and end with the BLM movement, but should continue on an upward trajectory. Asset managers need to be more proactive, panellists highlighted at last week’s inaugural ‘Global Investor Strategy and Corporate Governance Forum – Race to Equity’ event.
The Forum is supported by a consortium of organisations looking to promote ethnic and racial diversity in the investment industry, including The Network of Networks, The Black British Business Awards, London First, The 30% Club, The 100% Club and Diversio.
The asset management industry needs to start having internal conversations about ethnic and racial diversity, said Founder and Chair of the Forum Sophie Chandauka, Global COO of Shared Services and Banking Operations at Morgan Stanley. From there, firms need to set their own targets and hold themselves accountable, starting with the c-suite.
“We need to focus on making sure that we understand the dynamics within our own environment, and not pretend that the law is an issue, because it’s not. Improving ethnic diversity in the workplace has been done, and it can be done very well.
“The problem that remains is the conversation,” Chandauka added.