Consultants spotlight diversity, equity and inclusion in asset management

Investment consultants and OCIOs are on the frontlines of encouraging diversity, but benchmarking the actual work of change remains an ongoing project that is just getting underway.

Major investment consulting firms this year have taken a closer look at the industry and themselves to pinpoint some key challenges investors are facing in their efforts to successfully implement inclusion initiatives.

Meketa Investment Group in a survey of its private market managers in its internal database found that managers were interested in discussing policies and initiatives rather than specific diversity stats for decision-making positions such as board of directors, equity owners and senior management.

“Diversity, equity and inclusion are of the utmost importance to Meketa, internally and externally, as we create a more dynamic firm and work with our clients to help them build investment programs,” said Stephen McCourt, co-CEO, Meketa Investment Group. “While we consider Meketa a market leader in evaluating and recommending diverse managers for institutional asset owners, we recognize this effort is ongoing, with continuous opportunity for improvement. We believe our annual questionnaire evaluation system will more fully encourage diversity, equity and inclusion in all its forms, strengthening organizations and outcomes for our clients.”

The results of Meketa’s recently released Diversity, Equity & Inclusion (DE&I) Questionnaire will be used in the firm’s manager evaluation and selection process, officials said as they gathered responses from 283 firms overall. What officials found was that boards of directors and those with equity ownership in an organization are the least diverse in both race and gender.

Lower-level positions are the most diverse in terms of race and gender. Of firms in the top quartile based on the percentage of minority and female employees, operations were 48% minority and 57% female. Administrative positions among this same group were 56% minority and 100% female.

Meketa said stronger results in their future surveys will mean a higher overall diversity and inclusion ranking. They expect the questionnaire will be included in all of the firm’s request for proposals and due diligence questionnaires going forward.  

The hurdle for some of the firms likely remains high. Generally, Meketa found that larger investment firms have more robust policies and to dedicate a greater amount of resources to DE&I than smaller organizations. Many smaller firms that ranked high for diversity statistics do not have policies in place due to lack of resources or they cited that due to the diversity of the staff specific policies were not in place.

Overall only 28% of firms have a plan to expand equity ownership to women or minorities. The efforts generally fall to an Environmental, Social, and Governance (ESG) committee or a chief diversity officer rather than through a dedicated DE&I committee.   

But does this fall short of investors expectations? And following 2020’s unprecedented focus on lasting social change movements, the trustees at pensions and endowments seem to still be assessing how they can have the most impact. Alternatives Watch is conducting its own investor survey the results of which will be released next month.

Aon surveyed clients and institutional investor contacts from late December 2020 through mid-January 2021.  A total of 100 investors, primarily based in the U.S., ultimately responded to the survey questions. In total, 58% said that last year’s events, including the death of George Floyd, had influenced their thinking on diversity, equity and inclusion in investing. Nearly 20% reported that constituents, boards and beneficiaries are now asking for statistics on diversity within their portfolio.

After that the reports on progress are mixed. Many in Aon’s survey reported taking at least some steps to bring diversity into their investment portfolio, although 31% said that they do not have a policy or program and do not intend to have one in the future. Another 36% state that they do not have a formal diverse manager policy or program but that they do encourage diverse investment management.

For pre-launch women and minority asset managers, options remain limited, Aon said. Only two survey respondents, both from public sector pensions, reported that they would seed diverse managers. There appear to be more avenues for active intervention for diverse asset managers with a track record, officials at the consulting firm asserted.

Then there is the idea of checks and balances at the consulting firm level. NEPC for the first time published a review of its own work in the area in its 1st Annual Diversity, Equity and Inclusion (DEI) Progress Report.

The firm boasted a 72% increase in the number of research interactions with diverse-owned and diverse-led firms and achieved a 45% increase in representation of these firms in its focused placement list. There was also some success claimed with its own internal staff in that 58% of NEPC’s new hires in 2020 were diverse. Gender diversity at the partner and principal level is nearing the same rate of the firm’s overall employee population where 36% are female.

At the most senior levels, ethnic and racial diversity (10.8%) remains lower than ethnic and racial diversity of the overall NEPC employee population where it is remains 24%.

“You cannot manage what you don’t measure,” said Sam Austin, partner, executive committee member and manager of NEPC’s Western U.S. Public Funds Consulting Team. Austin has spearheaded the firm’s DEI efforts since joining in 2017 and is currently chair of NEPC’s Diversity and Inclusion Board. “We hold ourselves accountable to specific goals for diversity, equity and inclusion in the same way we manage our progress toward any other important strategic objective,” he said. “Progress does not always occur in a straight line, so quantitative data may differ from year to year. But we will always be transparent in reporting on whether we are making meaningful improvement over time.”

NEPC officials said they hope their actions in publishing a progress report on themselves will challenge other investment consultants, asset managers and investors to transparently set, pursue and report on their goals for diversity, equity and inclusion.

Partner and Co-Chair of NEPC’s Diversity, Equity and Inclusion Network Chenae Edwards added in a statement, “The lack of diversity and equitable practices in the finance industry is the result of decades of persistent actions – or lack thereof – by leaders, board members and companies. The moment requires similarly persistent actions from all stakeholders to reset our industry’s foundation to reflect the rich diversity of the global marketplace.”

All seem to view 2020 as a year that kick started an initiative that had long been necessary on Wall Street.

“While we are pleased with the response to our first annual Diversity, Equity & Inclusion Questionnaire, we do expect to see progress in DE&I efforts and even greater questionnaire participation over time,” said Peter Woolley, co-CEO, Meketa Investment Group. “Moving forward, we believe investment managers can further differentiate themselves by implementing a variety of DE&I-focused initiatives such as diversifying boards, expanding ownership, establishing mentorship opportunities for staff, and partnering with MWDBE service providers. Such efforts will further advance our industry and lead to more informed evaluation and decision making in the years ahead.”

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