Diversity in the context of investing is becoming a bigger issue, so what approaches are being followed to shift the dial on the issue? This was the starting point of portfolio institutional’s diversity debate, a recording of which is available here.
ESG product specialist at Carmignac
Senior global ESG and diversity manager at Legal & General Investment Management
Investment director, sustainable and impact investing group at Cambridge Associates
Head of UK core institutional
and consultants at Invesco; and co-chair of the race and ethnicity workstream at the Diversity Project
First principles: investing in diversity
Lydia Guett, investment director in Cambridge Associates’ sustainable and impact investing group, shared some insights into the ways diversity can be integrated into investment decisions. “There are two dimensions in how we look at this: one is looking at asset managers and understanding their corporate diversity as a team. For us, this is important as we believe diverse teams make better decisions.
“The other big part is diverse and inclusive investing – and gender lens investing is probably the most common,” Guett added.
This splits into different levels. “One is access to capital, so looking for female investors, as they have been hugely under-represented,” Guett said, adding that they pay particular interest to the investments women make. “We look at any manager that invests in companies that make products specifically targeted to women.
“And then there is investing in companies that have a specific and favourable environment for women,” she said, citing parental and maternity policies or more flexibility to enable more women to become senior managers.
This sits within gender-lens investing as de ned by UN Women, which is intentionally allocating capital and aligning investment strategies, processes and products to “achieve positive and tangible contributions against women’s empowerment objectives” while having the potential to generate a financial return.
Candice Bocle, ESG product specialist at asset manager Carmignac, shared some similar ideas on female investment. “We also focus on women as investors,” she said. “We look for broader and diverse investment teams. Our team is diverse.”
For Bocle, it is also the future opportunities offered by companies that make them an attractive investment. “The most important thing for the companies we target, and for us as a rm, is to have a pipeline of talented people, who will be in a position to take future leadership roles versus always looking outside to recruit people with a diverse background,” she adds.
And when it comes to diversity and investment, Guett references research by Cambridge Associates. “When it comes to ESG, in Europe – the environmental part – is strong and has been ahead in developing products and investment approaches. Whereas in the US – the social part – social equity, is strong.”
What is interesting is how the firm believes investors can expand their universe via diversity. “Investing in diverse managers, not only gender, but also ethnicity and social background, gives you a broad understanding of diversity, which increases your investment universe,” Guett said. “This is not about exclusion; it is about including new groups of investors with investment opportunities that in the past have not been focused on.”
This has clear implications for investors. “If you have a bigger investment universe, you potentially could find more interesting, more niche, more valuable investments as you are plugging into opportunities you would otherwise overlook,” Guett said. “This is about being more open to innovative investment opportunities.”
She also discussed a myth about diverse investing. “Usually, the understanding is that there are not many [diversity-related investment] products. But if you look at the entire investment scale from public to private investment opportunities, you can build a portfolio that has a strong diversity and inclusion focus, across private markets specifically.”
Indeed, the demand for diverse investing methods and approaches is a fundamentally important growing area, said Sachin Bhatia, head of UK core institutional and consultants at Invesco. Bhatia, who is also co-chair of the race and ethnicity workstream at the Diversity Project, said: “With the asset owners and asset managers we talk to there is a realisation that when they structure their portfolios they are looking for diverse asset allocation, diverse managers and diverse strategies.”
He added that it is intuitive from an investment perspective to look for diverse teams. This can also be seen as part of a growing investment and boardroom rejection of corporate group-think, Bhatia said. “It is quite intuitive to investors now that they do not want that herd mentality, instead wanting a team and approach that embraces diversity of thought for better outcomes. It is academically proven that a diverse approach will bring out better outcomes, and hopefully, a better risk-return profile for the investors.”
Guett shared her criticism of the groupthink mentality. “From our point of view, it is important to be more inclusive and broader when looking at the investment opportunities. You see a lot of crowding in public markets. There are a lot of managers with the same names cropping up: where is the alpha if everyone invests in the same opportunities? So investors need to broaden out into more niche opportunities.”
Guett said Cambridge Associates found managers with a diverse and inclusive investment team and strategy are usually emerging and up and coming. “They are less proven. Perhaps they do not have the natural track record. So underwriting them as an investor is more difficult. We focus on those emerging managers, while providing feedback about what they need to change to be seen as a better institutional [investment] opportunity,” she added.
Changing the narrative: taking action
Moving the debate onto instigating change in the investment industry, Clare Payn, senior global ESG and diversity manager at Legal and General Investment Management (LGIM), revealed the importance of campaigning, which she has been doing for more than a decade.
She gave some insight into how ideas about diversity have been turned into action. “Being an index investor, we hold everything [that makes up the index], so the big focus for us is engaging with companies to improve their representation and policies. We have been campaigning on this for about 11 years. “It started with the education side of things, where we put out one of our thought pieces. This explained why we felt it important to invest in companies with diverse teams.
“So it was about the ‘why’. There was plenty of research coming out of McKinsey and Deloitte. It was an argument about why this is important. We wanted to put our voice out there as a large investor to say why we believe this was, and is, important.
“Diversity”, Payn added, “is difference – and that is what we are looking for. To ensure teams are making the best decisions.” LGIM, therefore, joined the 30% Club and then the 30% Club Investor Group to galvanise investors “on what we felt was, and is, a crucial topic”, Payn said.
Then things started to evolve. “Then we thought: how do you move from why this is important to how do we deal with this? That has been challenging for different investors. For us, it started when we targeted the largest companies rst: the FTSE100. Our home market seemed a sensible place to start.”
Given this tactic and the time available, Payn added: “You cannot move a massive topic like this in one action. But we wanted to take action and not just talk about it. We set out expectations and that became important.”
And then LGIM moved on to how to create change. “Our vote is a powerful tool,” Payn said. “And we use it responsibly on various issues from climate change to diversity. We have seen over the years that our votes make an impact. We continue to escalate this voting policy.”
This has broadened out beyond the FTSE100. “We are now targeting Japan, the US and companies globally,” Payn said. “Our policies have nuances to react to the culture and environment we are addressing – as different geographic regions are starting from a different base, and we try to be sympathetic with that context.”
As a result, real progress has been made. “We have seen progress on gender – it seems slow, granted, over 10 years, but has grown from 9% of females on boards to more than 33%. It could be seen as slow compared to the ethnicity push, which has been fantastically well received given the results we have seen from our recent campaign.”
Bhatia said that while there have been some changes that have been pushed for, there also has been a great deal of willingness from the investment world to accept the importance of the issue. “Coming at it from the industry-wide perspective, what we have seen over the past few years has been a lot of goodwill, emphasis and understanding that we needed to move the nee- dle on ethnicity, diversity and inclusion.”
He then highlighted some campaigns he has been responsible for and the aims they have to make change. “At the Diversity Project we have had the Talk About Black campaign and the race and ethnicity workstream, which are key tenets of raising awareness around the experiences of people from different ethnicities. We had a campaign called Fish Out of Water, where people were sharing short stories about their lived experience.
“We are exploring how someone’s religion and culture can impact on their career and intersectionality, where the different aspects of you as an individual will have a different impact on how your life experience will be in the workplace, and finally, work progression. There are a lot of initiatives around career progression, from the grassroots where there are 10,000 black interns and the CityHive mentoring scheme.”
Returning to his original point, he qualifies this: “One of the key things that have been apparent is there is a lot of good intention, a lot of good will, but importantly, a lack of data. Until you have the data, you cannot understand where the gaps are, where the weaknesses are and where the fixes are needed.”
Therefore, Bhatia is pushing for the 90% Campaign. “What we are aiming for across the industry is for all firms over the next two years to disclose 90% of the ethnicity data for their workforce. The work we are doing at the moment is trying to understand where there have been success stories with firms with that high participation rate.”
The average is currently 50% to 60%. “At Invesco we are edging 70%,” Bhatia said. “There are some firms closer to 90%, which is aspirational over the next two years to work towards. We then will have a better understanding of the ethnicity composition of each workforce and be able to address some of the bottlenecks and issues connected with that.”
Bringing the changing narrative back to investment, Guett added: “What we can control is the engagement with the asset managers. “Asset managers say: ‘There are not enough female investors.’ That is something we cannot accept. We need to build the pool for females to move up the ranks.”
Bocle added though she has noticed a shift in discussing diversity. “We have moved away from a debate around ‘does diversity lead to better financial returns’, to it being the right thing to do to attract the best employees and address needs globally. We have made progress, but I acknowledge there is a long way to go, but it is getting better.”
Bocle also indicated how a new fund from Carmignac can help. “As part of the new social fund which will have two legs – one on employer engagement and the other on customer satisfaction – we address diversity indirectly. But importantly it is going to be data driven, so we will continue to engage with the industry and with companies themselves to improve our data- base and help move the needle for social data to catch up with environmental data and the social taxonomy within Europe. I am looking forward to engaging with companies on this.”
Exploring diversity of thought
Payn has also been an advocate of cognitive diversity. “Talking about cognitive diversity was trying to set the picture for what we were talking about,” she said.
“A lot of people used to have different ideas about diversity. It quite quickly became synonymous with gender as it was with women where we started as an investment industry on this journey. It came from ‘the not enough women on boards’ approach, but we know it is a lot broader than that. And the conversation has picked up in recent years.”
Diversity, as she indicated earlier, means difference. “But it is how we measure that difference,” Payn added, “which is what we are trying to do, but it is quite hard. To do that you are using proxies essentially: using gender as a proxy, or socio-economic background, or ethnicity – and that is the only way we can get a measure for a difference in thinking.”
Expanding on this, Payn said: “It is a non-tangible thing we are trying to do. And that is quite hard. It is about the different lived experiences. If you have people around the table that look the same then you are going to be sitting in an echo chamber agreeing with each other.
“And that is not what we are after. They should be harnessing the right opportunities, assessing the right risks. So that is where we are trying to get to with the phrase ‘cognitive diversity’.”
It is then crucially “about the diversity of thought”. And Payn added: “You cannot do that unless you use the lenses and streams we are using and ensuring there is a cross-section of people in leadership teams and on boards of companies. We are then challenging ourselves, and each other, so we can get to a position that the companies we invest in on behalf of our clients are diverse.”
The importance of data
Within the diversity debate a crucial component is often overlooked, but one already alluded to, that of useful and effective data. “Data is absolutely crucial,” Payn said. “It is still not great. It is patchy. You cannot develop engagement strategies, voting policies and investment decisions without data.
“And the knowledge that investors are placing so much importance on diversity, it is crucial that companies understand they are being assessed on these different elements. In the ESG schools we developed a number of years ago, we had 28 metrics [of measurement]. There are four clear metrics at the moment on gender diversity, but we want to broaden it out. Again, the data is not great.
“Here we have taken gender diversity at four different points: gender representation at board level, at executive level, at management level and in the broader workforce. We are assessing companies on the cross-section of representation. This is then developed into an overall ESG score.
“That score is tilting some of our portfolios in or out of some of those companies depending on that higher or lower score. These steps will help us to get better data over time.”
Bocle said the disclosure of data could already be emerging through other influences. “Companies have come to understand it is in their interest to disclose more data. As social funds are emerging, more capital will be allocated to the forms that are best in class and instigate the right initiatives. And with the rise of social media there cannot be black boxes anymore. The reputation of a company is at stake. So releasing more information on diversity is key.”
Good proposals: asset owners take the initiative
There have been some good initiatives within the investment world to address diversity. There is the commendable Asset Owners Diversity Charter and the working group that sits behind it.
“That is a great initiative,” Bhatia said, noting there is a connection with the issue of data in which the group can contribute to changing. “There is an onus on asset owners and asset managers to not only collect data but also make it easier to supply, creating some uniformity in terms of format or how it is digested and used,” he said. “So everyone targeting the same type of outcome is important.”
Payn said the Asset Owners Diversity Charter initiative helps investors look inwards, at their own processes and approaches, as well as outwards. “Looking internally is important. We are saying as an owner this is what we expect of companies and we need to expect that of ourselves as well. That’s crucial. It means we have to hold ourselves up to a high standard and the initiative is helping to do that.”
Guett agreed. “The creation of the organisation is fantastic. It helps everyone. From our point of view, it is dependent on where the investor would like to make an impact, where their values are and where they would like to align their portfolio.”
The changing look of diversity
So what does diversity and investment look like? “It is a holistic approach. It is trying to build an approach that is not just in one direction,” Payn said. “For us, it is around education, keeping this on the agenda and keeping on it as a topic. It is easy for topics to drop off. As other things climb up the agenda. As well as continuous engagement with the companies we invest in.”
Offering his take, Bhatia said: “Coming from the asset management industry side of things, it is important that we make sure that while we are pushing, quite rightly, for greater engagement and investment policies where appropriate, as well as greater transparency in companies we are investing in, we need to be held accountable in our industry.
“It is not something that will happen overnight,” Bhatia added. “We are making steps in the right direction – in terms of collaboration. Data is the starting point. You cannot fix a problem until you identify what the problem is.”
For Guett, engagement is absolutely key. “This is not a challenge that will solve itself. We actively need to set targets and move behind achieving those. For us, we invest from a portfolio perspective along three lines: one is focus, allocating to those asset managers that have a more diverse background.
“Second is a more holistic approach which is across the entire portfolio looking for opportunities to invest in products and services focused on the diverse part of the population, and then we have another part, one where investors are still learning about diversity. This is what we call a neutral approach. So we get everyone on board – and then as an industry we can make a difference.”
Bocle said the need to offer more diverse financial products is important. “The goal of targeting more female investors means we have to offer financial products that speak to their values and help women to save earlier, for example. This is going to be achieved through education. And as an industry we need to engage with universities. We need to have more role models, so women and other groups can see the possibilities and opportunities. And that is key.”
Looking to the future, how did the panel hope the diversity debate would develop over the next five years. “I hope we move on from the why. Instead, is the thought about how [diversity] is baked into every company,” Payn said. “If we are not supporting diverse people within businesses then it is not going to thrive. I would like us to get to the point of falling off a log: it just comes naturally.”
Bhatia said we need to bring out the best in people. “We want to be in a position in firms where the workforce is a good representation of their customers and society as a whole and the best people have to be in the jobs they deserve to be in – so there are no barriers in place and people can flourish.”
Bocle added that chief executives need to turn their rhetoric into reality. “CEOs often say people are their best asset. So if you want to walk the walk you should invest in your people and empower human resources to innovate and make sure that employees are doing their best. But also make sure the company adapts to a changing environment. You need people who are going beyond the scope of their job description and creating innovation.”
On a buoyant note, Guett said: “A world where a white male team is seen as odd because everyone is just diverse. And in terms of asset allocation, we as investors are less apprehensive about allocating to diverse teams. With a greater access to cap- ital, that would be a fantastic world to live in.”