Institutional investors are becoming more attuned to diversity, but how should they address and define the issue. Andrew Holt investigates.
Diversity has become an important institutional investor issue, having been brought into sharper focus over the past 15 months following the death of George Floyd and the campaigns that have put various social justice issues center stage.
A survey by Aon reveals that institutional investors are more focused on diversity, with 58% having become more attuned to gender and ethnic issues in their investment approach and thinking during the past 12 months.
Meredith Jones, who heads up Aon’s ESG initiatives, says: “I think a one-year change in overall concern and receptivity to increasing the focus on diversity is pretty amazing. I wish it was 100%, but 58% is good. Plus, some of the remaining 42% already have programmes, so it is not the case that 58% say, ‘yes diversity is good’, and 42% say ‘no, we don’t want that’.”
However, Deborah Gilshan, an independent adviser on diversity and ESG, is disappointed by the findings. “It is encouraging – but I thought it might be higher. Overall, it is a great platform to build on. Over the past 16 months, I have seen diversity and inclusion emerge as a key priority for many institutional investors in their stewardship work and engagement with companies.”
But Sophie Chandauka, chair of The Network of Networks, which mentors corporates on diversity issues, welcomes the numbers highlighted by Aon. “Any conversation regarding race equity in the context of the investor community is very welcome,” she says. “The level of attention currently is unprecedented, and it should not wane.”
But Janice Turner, founding co-chair of the Association of Member Nominated Trustees (AMNT), identifies one key investment issue that is a major stumbling block in embracing the diversity narrative. “A big problem is that many pension schemes invest in pooled funds. And fund managers who use these funds take a view that if you invest in pooled funds they will not accept a client voting [diversity] policy. And this involves an enormous amount of assets. It is a major issue,” she says.
A key central message from AMNT’s research is how fund managers are failing to address, or even acknowledge, diversity.
AMNT has undertaken a timely study into how fund managers deal with diversity, with some revealing results. “We have done a study into fund managers voting policies, beginning before Black Lives Matter (BLM) really started,” Turner says, “then we measured how fund managers approach changed in relation to BLM. And although some have changed, we are very concerned that some have not.”
In addition, there is, Turner says, a worrying trend of fund managers only listening to big hitting institutional investors on this issue. “We have found that smaller investors get ignored. That is a big problem.”
Asset owners step up
This is a highly salient point, and one in which asset owners have stepped up to address by creating the Asset Owner Diversity Working Group and with it the Asset Owner Diversity Charter. Signatories to the charter are committing to consider diversity and inclusion when appointing fund managers.
Helen Price, stewardship manager at Brunel Pension Partnership, and part of the working group, says: “We expect fund managers to manage diversity as a material investment issue, but we question how well they are doing this if they are doing little to address it in their own organisations.”
The motivation behind the group is simple: as the world’s top 10 fund managers are responsible for $40trn (£29trn) in assets, if they promote diversity, this could have a big impact on the issue globally. This is part of a wider trend, observes Gilshan. “The investor voice on diversity is only going to get louder, collectively and individually,” she says.
This is already evident in the growth of the investor group within The 30% Club. In 2011, in the UK it had seven investors managing £1.6trn in assets and now has 14 investors with £11trn in assets under management, including pension funds, asset managers and charity investors.
“It is a symbol of the trajectory of the growth,” Gilshan says. “We now have The 30% Club investor groups across the world: in Australia, Brazil, Canada, France and Japan, so this isn’t just about the UK, it is a global issue. It is about human capital, talent management and getting the best people.”
There’s something in the way
What though are the obstacles to fund managers addressing the issue? Turner gives an interesting insight. “There are various factors,” she says. “Some fund managers may pride themselves on their ESG voting policies, and consequently, be reluctant to listen to others, because if they did, it might appear that their policy is less than ideal.”
Here you have the bizarre situation of fund managers who promote themselves as being ESG-aware and proactive but are holding diversity policies back because they do not want to be exposed as having a less than outstanding approach. “On the other hand, you also have fund managers that ESG is simply not a priority,” Turner says.
Leanne Clements, campaign manager for the AMNT’s Red Line Voting, which influences how pension schemes should vote their shares on ESG issues, reveals how fund managers use data, or the lack of it, as a smoke screen to hide behind addressing diversity issues. “One of the biggest reasons given by fund managers as to why they do not have a voting policy on ethnic diversity is a lack of data – ‘we cannot hold companies to account because we do not have the data’ they say.”
Here, Clements believes that investors should be doing more. “Investors should be playing their part and forcing companies to publicly disclose their equality data.”
But Brunel’s Price says getting the information and data is an issue. “Information on race, age, ethnicity, sexuality and socio- economic backgrounds are not being consistently collected in a way that equips the industry to identify barriers and make meaningful progress,” she adds.
This is a point echoed by Jones regarding diversity within the investment approach. “You need transparency of data to be able to make assessments as to where the portfolio stands right now from a diversity standpoint to make progress,” she says.
Turner warns that changes which should have been instigated as part of other diversity initiatives have failed to materialise. “If you look at the Parker Review, which in 2017 said it wanted every FTSE100 company with at least one ethnic minority director on the board by 2021. That should have been achieved. It hasn’t.”
This highlights a problem within the diversity narrative: there is a lot of well-meaning talk, but when it comes down to it, there is little in the way of meaningful action.
Is there a case for investors to divest from a company over a failure of diversity – as has been the case with ESG-related issues? “Divestment could be a final option,” Chandauka says. “Where company policies and/or practices produce statistically significant and differentiated adverse impacts for consumers or local communities of a certain race or ethnicity, shareholders should vote with their feet.”
Chandauka also notes that there is a powerful persuading tool here. “You focus minds in the boardroom when you talk about shareholder interest in a particular subject and how the subject links to capital or public perception of the franchise,” she adds. “Race equity falls within the “S” in ESG and there is commercial and reputational risk associated with companies failing to have race action plans with key performance indicators of substance. The increased profile of diversity and inclusion resolutions in the 2021 AGM season confirms that we have entered a new realm of stakeholder capitalism.”
A point also made by Gilshan: “For investors, the potential of investor capital is transformational on this issue. The investor role is so critical in getting the systemic solutions we need. We are beginning to see equity investors shift their emphasis as there has been an increase in shareholder resolutions on diversity and support for those resolutions.”
Shareholders, therefore, seem to have got the message. “Shareholders are beginning to use all the rights available to them to work assertively with boards and challenge nomination processes,” Gilshan says. “If you look at gender as an example, we have been talking and engaging on this for over 10 years. We have had two government-led reviews on gender and the FCA is now suggesting a gender board target of 40%. With all of that there are no excuses for companies to not deliver.”
And Jones notes: “Diversity needs to be a multiple inflection point that hits all parts of the investment lifecycle. Some institutional investors have long carved out part of their investments for diverse asset managers, which is great. But that has happened over 10 to 20 years and it has not grown the assets under management in the number of diversity managers out there.”
What is it?
One of the big issues surrounding the diversity debate is its definition. Is it about gender, race, LGBTQ+, socio-economic background, disability or mental health and wellbeing? Is it all these things? Or does one take precedence over the others?
“In terms of focus, it is not either/or on one issue – and that is the problem,” Clements says. “It is a broad spectrum – not one way or the other. We wouldn’t advocate that diversity equals gender or ethnic diversity, but we cannot go the other way either, where the expecation on investee companies is too vague. As it then could create the situation where people ask: what are the exact outcomes that the investor is trying to achieve? It is about maintaining a definition in all its diversity elements, but also getting into detail as to what outcomes you expect from investee companies.”
But for Jones, the lack of a clear diversity definition is a problem. “There are barriers to overcome. Diversity definitions are not agreed upon universally.”
Is there a broader, more all-encompassing answer to be found in a socio-economic definition? “A lot of people have an issue with a socio-economic approach in terms of definition: how do you define class?” Turner asks.
A point shared by Chandauka, who, in turn, points to the importance of race in the diversity debate. “Some organisations use social mobility as a euphemism or avoidance tactic. Rather than having a specific conversation about race and what the data is telling us and coming up with specific interventions, we opt to aggregate a number of important issues that should be understood and addressed in their own right in the bucket of ‘social mobility’ – to avoid the discomfort of more sensitive topics, such as race at work.”
But Gilshan believes that all of these issues are interconnected. “The intersectionality of diversity is so important: gender, ethnicity, socio-economic background, LGBT+ and disability considerations can only lead to better opportunities for everybody.”
And this has real meaning for investors and companies, as diversity is: “Strategic, all-encompassing policies that consider gender, ethnicity, race, disability, sexuality and neurodiversity but which also link to the company’s strategy. Investors are clued up to cut through some of the hyperbole,” Gilshan says.
For Jones: “In a perfect world, I would like to see diverse investment talent plus significant diverse ownership: the latter is the cleanest measure to look at and who is making investment decisions it can be a little more difficult to ascertain.”
The varied number of ways to approach diversity could create potential confusion for investors, fund managers and listed companies.
But organisations need to instigate a clear plan, especially in relation to racial diversity, argues Chandauka. “The road to race equity will require deep reflection, culture and systems change in all spheres of a company. Just as with every other important business matter, organisations that are serious about race equity should commit to and publish balance scorecard on this matter: articulating, measuring, reporting and explaining performance against stated key performance indicators.”
Offering further advice to investors, Jones adds: “Number one, transparency is key. You can only mitigate what you can measure. Two, think about your investment programme: what levers can you pull to engage diversity in a more holistic way.”
It is clear is that the on-going diversity debate, and greater awareness and understanding of the issue, can be good not only for investors, but institutions and society as a whole.