Asset owners expect corporates and asset managers to provide greater transparency of their D&I progress.
In an ideal world, all workplaces would reflect the diversity of the world we live in. Unfortunately, this tends not to be the case, with minority groups consistently under-represented amongst entry level employees and, more strikingly, in the upper echelons of corporate management.
Asset owners are increasingly scrutinising both investee companies and their external managers on their efforts to ensure that their employees come from a variety of backgrounds, cultures and perspectives.
“Diversity and inclusion (D&I) is just as much a global priority as climate change,” says Alison Lee, Responsible Investment Manager at London CIV, one of eight UK local government pension schemes.
Asset owners are increasingly recognising that inequality is a systemic risk which needs to be addressed, both for the good of society and their business. Inclusive companies benefit from access to a wider talent pool and increased diversity of thought, both of which will help them better connect with consumers and other stakeholders.
US large-cap companies with ethnically diverse boards logged an average 1.5% higher stock return price compared to boards that were not ethnically diverse, according to research by investment management company Calvert. Further, a “modest increase” of women in the US workforce could add US$511 billion to GDP over the next ten years, benchmark and analytics provider S&P Global noted in a recent study.
Asset owners speaking to ESG Investor highlight a variety of groups that they want to see better represented in the workplace.
“Gender diversity is the most widely considered because it’s the easiest to measure, followed by ethnic diversity,” says Lee. “However, given the current cost-of-living crisis and the ongoing impact of the pandemic, socioeconomic diversity is rapidly rising up the investor agenda.”
To measure current D&I-related efforts and to drive more positive change – both among the companies in their portfolios and the managers engaged to act on their behalf – asset owners need accurate and reliable data, but also frameworks and policies to turn information into action.
“We need to gather as much information as we can on gender, ethnicity and broader diversity characteristics, in conjunction with developing a process where we can take action on this information to drive improvement,” Honor Fell, Sustainable Investment Officer of the Cambridge University Endowment Fund, tells ESG Investor.
Given that the quality and consistency of ESG-related data continues to be subject to debate, asset owners aren’t waiting for perfect information on D&I.
“Even across topics where the data isn’t so readily available – like with socioeconomic – that shouldn’t prevent questions being asked or asset owners having conversations about socioeconomic diversity with companies and managers,” says Sarah Miller, Vice President of the Manager Research Team at investment consultancy firm Redington.
From the shop floor to the c-suite
Today, most companies recognise the importance of strong D&I in the workplace, experts say.
Companies with poor D&I policies are more likely to suffer from reputational damage, limited ability to attract and retain talent, lower levels of resilience in the face of competitive pressures, and heightened litigation risk, said the Workforce Disclosure Initiative (WDI), which was set up by UK NGO ShareAction to track large firms’ disclosures on social-related issues.
However, corporate reporting often does not reflect these principles being put into practice. Asset owners end up monitoring a range on indicators and metrics.
WDI noted in 2020 that 98% of assessed companies said D&I is a priority, but many failed to provide data to demonstrate progress in key areas. Seventy-five percent provided a gender breakdown of employees, compared to 36% on ethnic composition. Further, only 57% disclosed their gender pay gap and 4% their ethnicity pay gap.
“Companies with the best practices disclose their diversity policy, set aspirational targets for senior levels and report implementation and progress in their reports and accounts,” says Diandra Soobiah, Chair of the 30% Club UK Investor Group and Head of Responsible Investment at UK auto-enrolment workplace pension scheme Nest.
The 30% Club is a global campaign to increase diversity at board and executive committee levels. Its UK Investor Group is a coalition of asset owners and managers that are responsible for stewardship on behalf of their members and clients and are committed to fulfilling the 30% Club D&I targets.
It is the responsibility of the company’s nomination committee to ensure that the board is suitably diverse, Soobiah says, and that each member has been appointed “on merit, against objective criteria and due regard for the benefits of diversity”.
For the broader workforce, London CIV’s Lee says a company’s family planning policy can provide insight into how the company is promoting gender diversity. If the company doesn’t offer sufficient time or pay to employees going on maternity leave, this may impact female employees’ mental health or discourage them from returning to the workplace altogether.
The emergence of flexible working policies is also a welcome change, she adds. “Companies with these measures in place will be able to better support employees that have just had children.”
UK think tank the Work Foundation recently published a report highlighting that remote and hybrid working has benefitted disabled workers, with 85% saying they are able to be more productive from home.
London CIV is also prioritising engagement with companies on providing “more granular diversity disclosures”, including socioeconomic metrics, according to its 2022 voting policy. The policy further outlines how it will oppose the nomination committee or board chair of any FTSE 100 company that doesn’t meet its minimum criteria for ethnic and female representation at a board and executive committee level.
Companies want to do better, says Nest’s Soobiah. “In some of [the 30% Club UK Investor Group’s] engagement with companies, we found they were keen to understand what good reporting looks like and what investors want to see beyond boilerplate regulatory disclosures.”
In response, the group has published a guidance toolkit for FTSE 350 companies to help improve their D&I reporting, which includes examples of current best practice, and is designed for use in multiple jurisdictions.
Looking closer to home
Most asset owners appoint external managers to oversee their investments, meaning that it’s just as important to have visibility of how they are prioritising D&I both in-house and when engaging with investee companies.
“Once you measure something, you can manage it and hold people to account,” says Fell. “We have the ability to hold our managers to account – and the responsibility to do so. Beyond gathering data, we’re also in a position where we can help develop best practice and drive change throughout the investment industry.”
Redington’s 2021 ‘Sustainable Investment Survey’ noted that 50% of asset managers’ investment strategies consider gender diversity when researching portfolio companies, while 38% consider professional experience and 37% consider race. Just 7% of equities-focused strategies and 4% of multi-asset strategies consider LGBTQIA+ representation in their assessments.
It’s important that asset management firms’ in-house teams strive to be more diverse and inclusive, experts say.
“We recognise that the financial sector isn’t the best representative of diversity, with a lot of senior positions held by white men,” says Lee.
While 80% of surveyed asset managers said that diverse teams have a “positive and real impact” on the investment process, only 3.5% have published their ethnicity pay gap metrics, the Redington report said. Further, investment teams “do not reflect the demographic of any country or region”, as 68% of all investment teams are white, and 78% overall are men.
Asset owners are taking matters into their own hands.
The Church Commissioners, which manages the historical property assets of the Church of England, recently updated its RI Manager Framework to include D&I criteria. The framework helps the asset owner to differentiate managers’ responsible investment activities and policies across seven themes.
The Church Commissioners will not invest with a manager where the investment team is solely one gender or ethnicity, or in instances where the manager is not actively taking steps to improve its D&I.
Dan Neale, Responsible Investment Lead for Social Themes at the Church Commissioners, says: “The way managers engage with holdings on our behalf will of course be informed by the voices in the room at the asset manager. As such, it is critical that D&I is promoted and gaps are addressed.”
In August 2021, a group of UK asset owners collectively managing £125 billion in assets, published the Asset Owner Diversity Charter to tackle the lack of diversity across the fund management industry.
The Charter consists of two key components. The first is a toolkit to aid signatories in the implementation of the charter, including guidance on due diligence measures, such as manager selection and monitoring. The second is an annual questionnaire sent to asset managers, asking for a mixture of quantitative and qualitative disclosures across industry, recruitment, culture, promotion and board/leadership sub-themes.
The charter will include questions on socioeconomic diversity in the future, once progress has been made by the City of London Corporation’s independent taskforce, which has been appointed by HM Treasury and the Department for Business, Energy and Industrial Strategy to boost socioeconomic diversity in UK financial and professional services.
“Asset owners don’t expect perfect results from asset managers or portfolio companies at this stage,” says Redington’s Miller. “Firms just need to as transparent as possible and demonstrate as much progress as they can.”