Diversity from an Investor’s Perspective 2019
May 2019 • Driving diversity • by Olivia Seddon-Daines and Yasmine Chinwala
This report looks at why and how the most forward-looking asset owners (such as pension funds, insurers and sovereign wealth funds) are addressing diversity and inclusion. Their opinions count – as an essential source of capital for financial markets, the needs and actions of asset owners have a big impact on how the whole system operates.
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Diversity is firmly on the corporate agenda, yet much of the capital markets industry has been slow to act. In Diversity from an Investor’s Perspective 2019 we look at what asset owners are doing, both internally and externally.
Our research shows that the most progressive asset owners are not only stepping up their advocacy and engagement on diversity, they are increasingly bringing diversity criteria into mainstream investment mandates and decision-making processes. Asset managers will need to step up preparations to answer both quantitative and qualitative questions about the diversity and culture of their teams as appetite from clients and investment consultants grows.
This report addresses the following questions:
- Why is diversity important to asset owners?
- Is there evidence diverse managers deliver outperformance?
- How are asset owners approaching diversity internally – within the investment function, their workforce, across trustee boards
- How are asset owners approaching diversity externally – by using diversity criteria when appointing external fund managers (including the role of investment consultants), as a theme for portfolio allocation, and by engaging with the companies in which they invest
We also offer asset owners suggestions and ideas on how to approach diversity and prompt financial intermediaries to act.
We researched 100 asset owners globally with combined assets of more than US$8 trillion, and we gathered information from a wide range of market participants. This report is an update to our ground-breaking November 2017 research Diversity from an Investor’s Perspective, and we have captured how thinking and actions have evolved (in some cases quite rapidly) over the past 18 months.
The research was conducted in collaboration with the Pensions and Lifetime Savings Association and supported by Pinsent Masons.
The highlights of Diversity from an Investor’s Perspective 2019 are:
1.On the radar: Diversity is firmly on the agenda of asset owners globally, although priorities and approaches vary. There are many examples of best practice from asset owners in North America, Australia, Scandinavia and the UK, but there is a considerable gap between the leaders and the rest.
2. Thought leaders: Progressive asset owners globally are doing more than ever to promote diversity and set an example, both internally and externally. They are increasingly vocal, transparent and confident on the subject of diversity and how it benefits the whole investment ecosystem, and their communications and advocacy are more explicit.
3. Motivations for tackling diversity: Asset owners’ understanding of why diversity is important to them is improving and becoming more nuanced, with improved decision-making as the top reason given for acting on diversity. However, views on the value of diverse managers to enhance fund performance remain polarised.
4. Inclusion and culture: For those addressing diversity internally within the investment function, the discussion is beginning to encompass inclusion and cultural change more broadly. Asset owners are drawing on common corporate action points to drive change, for example gathering more granular data across diversity strands and introducing flexible working.
5. Trustee diversity: Awareness of the need for and benefits of trustee diversity is growing and slowly turning into action, with a particular focus on encouraging more young people onto trustee boards.
6. Influencing manager selection: While not ubiquitous, more asset owners are asking questions of their potential and existing managers. Diversity queries are rising in number and frequency in requests for proposals, and discussions are becoming more difficult for asset managers to ignore.
7. Role of investment consultants: Thinking on diversity is evolving for the biggest firms. They are raising the topic in discussions with clients and being challenged on their own diversity by clients. Diversity and culture criteria are being integrated into manager assessment, but the approach is inconsistent across different consultants, asset classes and regions.
8. Mandate critical at the margin: Some asset managers take responses to diversity questions more seriously than others. High scores on diversity criteria may not be core to a mandate, however, answering diversity questions well could be the marginal difference between winning or losing a mandate when rivals are otherwise evenly matched.
9. An investment opportunity: The trend amongst US public pensions to allocate directly to diverse managers is growing, with schemes increasing allocations to emerging managers programmes. Diversity as a theme for investment analysis is also developing, with more indices and more products as the quality and quantity of data improves.
10. Gender takes priority: Diversity efforts are largely concentrated on boosting female representation, as this is where both qualitative and quantitative data is best established. Shareholder engagement activity is focused on board diversity, with some extending their discussions to the wider workforce and diversity strands other than gender.
Methodology and resources
In 2017 we conducted desk research on 100 asset owners globally, selected by size, activity and availability of information, with combined assets under management of more than $8 trillion. We have since updated our research for those identified as the most progressive on diversity. We analysed publicly available information (eg. websites, annual reports, responsible investment reports, press releases). We also gathered information from more than 100 market participants (including asset owners, investment consultants, trade bodies, proxy voting services, asset managers and corporate governance experts) via desk research of public information (websites, press releases, industry research) plus interviews and discussions. For further information on methodology and further resources on the subject, click here or contact New Financial.