Dimensions of Diversity: DEI in the Asset Management Industry

Among the issues that fall under the “S” (social) pillar of ESG, Diversity, Equity and Inclusion (DEI) in the workplace is arguably one of the biggest attention-grabbers. Many certification programs, conferences, books and podcasts are devoted to the topic.

Diversity is a key issue for companies and investors — we see major pension plans ramping up pressure on businesses to make improvements on DEI issues.¹

This month’s Perspectives on Sustainability discusses why we believe investors should view DEI as particularly important for the asset management industry.

DEI Definitions

What does each component of the term DEI mean for the workplace? While there are not yet officially recognized, generally accepted definitions, we think these descriptions do a good job of summarizing the basics:

• Diversity: Actively seeking different points of view — from the boardroom to the C-suite to the factory floor — from individuals representing a broad range of experiences, including gender, sex, race, ethnicity, sexual orientation, gender identity and life experience.

• Equity: Ensuring fair treatment and equal opportunity for all.

• Inclusion: Taking actions that encourage all individuals to speak freely (but respectfully!) and actively participate in discussions.

Why does DEI matter? To be frank and acknowledge skepticism about the concept, it is fair to ask what we are trying to accomplish through DEI initiatives, aside from checking boxes on questionnaires. Moreover, why do we think DEI significantly impacts the asset management industry?

Diverse Perspectives Improve Results

Most people recognize that groups with a wide range of perspectives and thinking styles have a competitive edge. Remember the exercise where teams are given random objects (e.g., matches, paper clips, lipstick) to solve a problem, such as getting rescued from a desert island, using just those items? Teams that generate a wide range of ideas develop the best solutions.

Diversity within a group is a critical component of effective problem-solving and decision-making. For asset managers, this can translate into better investment outcomes:

• The Times (UK) cites recent research showing that mixed-gender investment teams performed better than all-male investment teams.²

• Demographic diversity represents cognitive diversity — i.e., varied experiences, thought processes and ways of working. Cognitive diversity promotes better decision-making by helping to eliminate blind spots and accessing different resources and perspectives.

• A study published by the Kellogg School of Management at Northwestern University finds diversity “triggers more careful information processing that is absent in homogeneous groups.”³

Asset Owner and Asset Manager Perspectives

How are asset owners thinking about diversity, equity and inclusion when assessing fund managers? And how are asset managers benefitting from DEI in making portfolio decisions? Approximately 70% of asset owners from around the world that took part in a Coalition Greenwich 2022 institutional investors study say DEI standards play at least some role in selecting asset managers.⁴

The study notes that North American institutions are leading the push for DEI standards.

• Almost three-quarters (73%) of all U.S. institutions that participated in the study said DEI standards play a role in their selection of asset managers.

• One-third rated DEI as an “extremely” or “very” important consideration.

• Among Canadian institutions, 78% said DEI policies affect manager selection, with nearly 40% designating DEI as “extremely” or “very” important.

Among asset owner types, endowments and foundations in the U.S. are leading the charge in assigning importance to DEI.

• Almost 90% of U.S. endowments and foundations in the Greenwich study said DEI standards play a role in manager selection.

• Some 56% described DEI as an “extremely” or “very” important factor.

The issue has evolved to the point where DEI benchmarks are emerging. Human resources management software and services provider ADP plans to introduce DEI benchmarks that will allow companies to compare DEI metrics against their peers and the populations in their communities, using their HR inputs and compensation data from ADP’s workforce dataset.

Asset managers can use these benchmarks to evaluate an individual company’s DIE progress. Companies are interested in using the benchmarks to evaluate themselves, as they know asset managers will likely ask DEI-related questions.

Evaluating DEI Within Asset Management

Several studies on DEI in the asset management industry focus on the percentage of women- or minority-owned asset management firms, which is tiny (less than 2%).⁵ These studies show no measurable difference in performance between women/minority-owned firms and firms owned by men. So, from a fiduciary standpoint, there is no performance-related reason to reject diversity as a criterion in hiring asset managers.

However, we do not think the composition of an asset management firm’s ownership is necessarily the best metric to use, particularly with large, publicly owned firms. We believe it is essential to look at DEI across the firm, including whether women and minorities are adequately represented on the board of directors, in senior management ranks, in portfolio management and client servicing teams, and other areas.

In our view, what is critically important is that promoting DEI in asset management firms can benefit investors. As active asset managers, we know that our investment decisions are ultimately about how we look at things.

Of course, we use objective data in making these decisions, but every active manager’s investment decisions are ultimately subjective. As noted above, diversity improves decision-making, and active investment management requires decisions that cover nearly every industry and include just about every type of input.

In our view, investors should insist on diversity in the asset management teams that make those decisions, not for some feel-good reason but because it may produce better outcomes.

Corporate culture is one of the hardest things to assess from an investment perspective. DEI-related metrics we examine include turnover (by experience level, gender and ethnicity), pay gap, board and management team diversity (gender, ethnicity and cognitive), benefits and whistleblower policies.

In addition, investment advisors know the majority (roughly two-thirds) of millennials see impact investing as appealing and recognize that, as a group, they are more willing to sacrifice returns to some extent to achieve impact goals.

As wealth shifts from Baby Boomers to millennials, we believe diversity in asset management firms, especially whether women are in decision-making roles, will be an important issue for advisors to discuss with their clients.

Dimensions of Diversity

Similar to Scope 1, 2 and 3 carbon emissions, we think of disclosures in this arena in terms of “Dimensions of Diversity” for asset managers.

We expect the push for DEI disclosures to unfold faster than those for carbon emissions while following a similar path. Currently, we are seeing Dimension 1 disclosures increase and are maybe starting to move toward Dimension 2.

Much like Scope 3, carbon emissions are the most impactful from a climate perspective. However, the most difficult to measure, Dimension 3, will ultimately be the most important, but we are still early in this journey.