October 2017 • Ecommerce reports • Topic: Driving diversity • by Olivia Seddon-Daines & Yasmine Chinwala
Diversity is firmly on the corporate agenda, but New Financial’s latest report looks for the first time at what asset owners (such as pension funds, insurers and sovereign wealth funds) are doing on the diversity front. We analysed 100 asset owners globally with combined assets of $8 trillion to find out why and how they are approaching diversity – and how this affects asset managers.
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Diversity is firmly on the corporate agenda, with a growing body of research showing that it leads to better decision-making and financial performance – yet much of the capital markets industry has been slow to act. This report looks at how and why asset owners, such as pension funds, insurers and sovereign wealth funds, approach diversity (in the people sense of the word rather than in terms of investment diversification), because asset owners are an essential source of capital for financial markets, and their needs and actions have a big impact on how the whole system operates.
We researched 100 asset owners globally with combined assets of more than US$8 trillion, and we conducted more than 40 interviews with a wide range of investment market participants. We found that diversity is moving up asset owners’ agenda, with three-quarters mentioning diversity in their annual reports, and nearly half (45%) expressing their motivations for tackling diversity. The top three reasons given were to improve decision making, to attract and retain talent, and to innovate and compete.
This research was inspired by two things. The first was a public statement from the New York City pensions system in May 2015 saying that it was formally including diversity among its criteria for manager selection – we wanted to know if other schemes were taking similar measures and how were financial intermediaries responding?
The second was an event where New Financial was presenting data on female representation in financial services, at which a panellist said the industry would not do anything until clients asked them to. So we wondered if their clients were asking, and if so, what? And why?
The report addresses some of the following questions:
* What are the motivations of asset owners seeking to improve diversity?
* How are they going about it:
– across their trustees, the investment function and wider workforce?
– by engaging on diversity themes with the companies in which they have long term shareholdings?
– by using diversity criteria as part of their due diligence process for appointing external fund managers?
– as a theme for portfolio allocation?
The report also offers asset owners suggestions and ideas on how to approach diversity and prompt financial intermediaries to act.
The highlights of the report include:
1. Moving up the agenda: Nearly three-quarters of our sample (74%) mention diversity in their annual reports. Interest and activity around diversity have accelerated over the past two years.
2. Why diversity matters: Almost half (45%) of asset owners explain why diversity is important to them, with the top reason being to improve decision making. But there are still many people and organisations throughout the investment chain who are unconvinced and believe a focus on diversity compromises financial performance
3. Seeking change from the inside out: Asset owners are tackling diversity both internally (across their investment function and on trustee boards) and externally (by stepping up engagement with investee companies, including diversity criteria in manager selection, and allocating funds to target diverse groups). Of our sample, 42% say they are addressing diversity internally, 41% discuss how they are engaging on board diversity and 13% use diversity as a theme for portfolio allocation
4. Influencing manager selection: Diversity is beginning to influence manager selection – diversity criteria are coming up more frequently (in requests for proposal and investment consultants’ due diligence process), there are more questions and they are more focussed. Asset managers need to be prepared to answer them
5. Challenging managers: The interaction between asset owners and their asset managers is evolving from a purely transactional relationship to a more collaborative one. Some asset owners are actively challenging their investment managers and working with them to improve their diversity, as well as allocating to diverse managers
6. Becoming part of investor DNA: Efforts around the topic of diversity are generally initiated by passionate individuals, but increasingly their conviction is being translated into processes, structures and policies to formalise asset owners’ commitment to diversity, both internally and externally. This is an important shift towards sustainable change.
We carried out this research in collaboration with the Pensions and Lifetime Savings Association, supported by Columbia Threadneedle Investments, Hermes Investment Management and Brown Brothers Harriman.
To request a copy of the report, including the appendix containing the list of asset owners in our sample and resources for further reading on diversity, please click here.