NEPC will launch a diversity, equity and inclusion rating system this week for the money management firms the Boston-based investment consultant and outsourced CIO provider vets on behalf of institutional clients.
Executives said NEPC's latest initiative should leave the firm at the forefront of industry moves to establish a more transparent, data-driven backdrop for consideration of DEI criteria.
"It can be paralyzing trying to look at the entire industry and create an industry standard across all different principles — asset owners, investment consultants, asset managers," noted Will Forde, partner and co-chair of NEPC's diverse manager committee.
Instead, "we needed to get our own house in order and we're starting inside the walls of NEPC and our client base," said Mr. Forde.
NEPC's third annual DEI progress report, released Monday , detailed continued progress toward one of the firm's primary goals — lifting the proportion of "diverse-owned" firms with more than 50% ownership by women or minority groups and "diverse-led" firms with 33% to 50% ownership to 15% of NEPC's list of top recommended money managers by 2024.
For 2022, the proportion of diverse firms rose to 13% of NEPC's preferred manager universe for consulting clients, up from 11% in 2021. Diverse managers accounted for 10% of NEPC's OCIO manager line-up, up from 7% in 2021.
Client assets managed by diverse firms, meanwhile, edged down to $40.4 billion of the $1.4 trillion in assets NEPC consults on or manages as an OCIO provider, from $40.7 billion at the close of 2021, a relatively strong showing for a year that saw markets falling sharply against a backdrop of aggressive monetary policy tightening.
NEPC doesn't set DEI AUM targets "by design," explained Mr. Forde. "We try to measure and manage things that are within our control" and ultimately NEPC's clients decide which managers to allocate to, he said.
Still, the latest DEI progress report for 2022 showed 59% of NEPC's consulting clients including diverse managers in their line-ups, unchanged from the year before.
Mr. Forde said NEPC's new ratings system could contribute to further progress on that score. "One of the benefits of the DEI ratings, moving forward … is that it puts the power of information back into the hands of clients," he said.
"We have a myriad of different clients, we have a myriad of different opinions on how to incorporate DEI and other things into their investment process. DEI ratings give them the opportunity to look at their entire portfolio of managers, for us to provide our insights directly to … empower them to say, 'this is important to us in this way' and craft it how they see fit, or how they don't, and so I think the DEI ratings … is really additive in this type of environment," he said.
DEI assessments of money managers will have "two components — a firm component and a strategy component," and NEPC will look beyond equity ownership, "which doesn't tell the whole story," noted Nina Petkova, a senior investment director with NEPC, in the same interview.
For the latest year, NEPC clients used 182 strategies managed by diverse firms, down from 188 the year before.
Meanwhile, if ESG has become a politically contentious subject lately in the U.S., NEPC executives said they haven't seen similar developments in the area of DEI.
"Fundamentally, we believe that, and we've observed that more diverse investment teams have helped improve decision making and outcomes and ultimately that tends to increase the likelihood of better investment results for our clients," Mr. Forde said.
Mr. Forde said the ratings will be disclosed to clients, some of whom may be obligated to disclose that information but will otherwise not be publicly revealed.
