Key Points:
Defining DEI
DEI initiatives are no longer just “check-the-box” exercises for companies. They have become a priority, especially in investment management services. Clients now expect investment managers to apply a DEI lens to their portfolios. They want to know the diversity of fund managers in their investments and how their investments contribute to DEI. As investment managers, we have to deliver on these expectations.
To guide our DEI efforts, we have developed a working definition. Diversity is seen as the presence of differences that make each person unique, while inclusion is the full engagement and development of all employees. This definition allows us to assess the types of diversity we consider in the investment process.
In our RI practice, we define DEI as intentionally seeking investment opportunities in minority or underrepresented populations in an equitable manner. This results in greater representation of minority-owned investment firms, increased assets under management for minority-run investment funds, and allocating capital towards investment strategies that consider and engage with companies on DEI criteria.
DEI and Responsible Investing
Responsible investing incorporates DEI criteria as part of assessing and engaging with companies. It falls under the “benefit stakeholders” category of ESG factors. Companies that manage ESG risks related to racial discrimination lawsuits or capitalize on opportunities to reduce carbon emissions are responding to investor assessments of ESG criteria.
Assessing fund managers and companies on DEI criteria is an important component of responsible investing. It provides insight into how firms treat their employees, engage with communities, and contribute to minorities and underrepresented communities.
The Long and Winding Road
Despite increased rhetoric around DEI initiatives, progress has been slow. For example, corporate board diversity demographics are on an upward trend, but representation still falls short. Companies are now looking beyond board diversity and examining ESG “S” factors that reflect how they treat employees and engage with communities.
DEI initiatives are not equal across sectors. While most S&P 500 companies go above legal compliance, there are key differences between sectors. Utilities companies score high on diversity programs but low on discrimination policies, while the real estate sector has room for improvement. Information technology (IT) performs well across the board.
Rubber, Meet Road: From Concept to Practice
To implement DEI strategies, investors can focus on:
1. Investment Firms: Identifying asset management firms with significant ownership by minorities or underrepresented populations and diverse representation throughout the company.
2. Portfolio Management: Hiring diverse portfolio managers and allocating capital to more diverse managers.
3. Security-Level Analysis: Assessing the DEI policies and practices of companies in which funds invest, including anti-discrimination policies, diversity programs, and leadership diversity.
However, the lack of available DEI data is a barrier to implementing a DEI lens to portfolios. Investment managers need to be more willing to share gender, race, and ethnicity data.
Diverse Representation as a Metric
Representation throughout the company is a critical consideration for positive outcomes for diverse employees. Black people make up 12% of the US workforce but only 8% of managers and fewer than 4% of CEOs are Black. Diverse representation also matters for investment firm ownership and management. Women- and minority-owned firms represent only 1.3% of assets under professional management.
Other DEI Metrics to Consider
Other metrics to consider for DEI include promotion and retention, access to healthcare benefits, and pay equity. Collecting this information helps identify quality companies that create healthy work environments for minority employees and stakeholders.
Conclusion
Implementing a DEI lens to portfolios requires considerations such as researching diversity make-up, assessing organizational climate for diversity and discrimination, and analyzing a company’s products and services to support communities of color. DEI goals and strategies vary, and there is no one-size-fits-all approach. However, investors can make meaningful progress in promoting DEI by incorporating these considerations into their investment practices.
