Investors telling managers: Show your progress

Even as money managers spend time, money and effort on improving diversity policies and practices over the past two years — for both their investments and their own teams — they're quickly realizing there's a new message from interested parties: share their progress, or lose out.

Asset owners, interest groups and employees all want to see whether and how money managers are making progress on diversity — even if the numbers are bad. As such, firms are also being pushed to release more data through a combination of external pressure and new initiatives launched by data compilers and providers. "The pledges, the affinity groups, these things are great, but they're really step one," said John Molesphini, Atlanta-based global head of insights at eVestment LLC. "The transparency that these datasets provide does put some measure of pressure on firms. You don't want to report bad numbers, but if you're not reporting anything, you're probably going to start losing opportunities to firms that are reporting something and are able to say we have a plan to improve. That's what investors are looking for."

While it hasn't happened quickly, improvements in diversity, equity and inclusion are being made in asset management. George Wilbanks, Stamford, Conn.-based founder of Wilbanks Partners, a firm that leads recruitment efforts for asset managers, said that the push from investors and employees to use data almost as a form of peer pressure to make change is effective, but adds that more can be done. "This is an industry that runs on incentives," he said. "If firms start losing opportunities with investors because they aren't diverse, you're going to see change happen faster. If people aren't getting promoted because they don't have a diverse team, change will start to happen faster. The labor market is having a say on this as well, we are seeing companies examine policies because they're losing out on talent if they aren't inclusive and flexible. That's no bad thing; if we're going to get better, firms need to be called out — they need to be compelled in some form to change."

With pressure building on managers to improve, a number of industry initiatives have launched in recent years with the aim of facilitating the collection of diversity data and information, as well as providing guidance on best practice.

In March, the Investor Leadership Network, a group of institutional investors focused on social responsibility, published its Inclusive Finance Playbook, a guide that provides information metrics and best practices institutional investors are using to assess DEI efforts and apply that information to investment decisions.

Tracey Flaherty, Boston-based senior vice president and global head of corporate social responsibility and public affairs at Natixis Investment Managers, with $1.4 trillion in assets, and co-leader of the Investor Leadership Network, said that asset owners are also considering DEI data in how they measure risk. "Firms that have diverse teams tend to have higher retention rates, the financial performance is better and these firms tend to be more sustainable overall — all of those factors are risk mitigators," she said. "We're seeing more asset owners take that into account within their risk models and investment decisions."

Earlier this year, the CFA Institute launched its DEI code for U.S. and Canadian firms. The code includes six diversity metrics signatories must report on: pipeline, talent acquisition, promotion and retention, leadership, influence and measurement. Signing on is voluntary, but maintaining the designation is not assured. Asset managers that sign on to the code have a two-year window to do the foundational reporting work and begin showing improvement or their designation will lapse.

Sarah Maynard, London-based global head, external diversity, equity, and inclusion at the CFA Institute, said she doesn't expect change to happen overnight, but adds that building in accountability by requiring managers to start collecting and disclosing data on diversity was a key pillar of how the code was constructed.

"We want to see forward motion," she said. "We recognize it's going to take time to recruit and refresh boards and update management structures, but we also wanted to put some limits around that. That's why we have the two-year limit to get the foundational work done before the designation lapses. We think that's a way to start creating meaningful change."

The collection and reporting of these data make it more difficult for asset managers to hide behind structural factors that they might claim otherwise make them slow to change, industry experts said. Many investment teams are small and firms pride themselves on having low staff turnover. As a result, without some compelling force to expand the team, if a non-diverse investment team is midcareer, it could be 10-plus years before positions open up, they added. In larger asset managers, with more staff, the timeline may be shorter but even in these firms, teams don't turn over all that often or expand.

And last year, eVestment announced that it would be including a new set of fields in the data it collects from asset managers. The company started asking for DEI policies and data quantitatively and qualitatively. Asset managers have the option to include a full quantitative breakdown of gender, race and ethnicity if they have it and/or there are explanation fields where asset managers can provide information on policies or plans if they don't have numbers available.

The fields are opt-in, but if asset managers don't have data or information to share it is noted that they declined to share. In jurisdictions where there are regulatory issues with compiling that information, firms can note that in the explanation field. That information is then passed on to institutional investors and consultants for free.

In addition to new data requirements, how asset managers consider DEI in their investment strategies and counterparties may also be creating change. Asset managers have been quick to institute proxy guidelines that push for greater diversity within public companies, even if that hasn't always been the case internally. Now, more asset managers are making sure their internal policies align with their proxy guidelines.

Changes to proxy policies have come on the back of moves by Institutional Shareholder Services Inc. and Glass, Lewis & Co., two proxy-voting firms that make recommendations on shareholder initiatives.

In 2021, Nasdaq Inc. changed its board requirements for listed companies, requiring that they have at least two diverse directors or explain in writing why they don't.

Abrdn PLC is one such asset manager in pressing for diversity in the companies in which it invests. In March, the firm, with £542 billion ($731 billion) in assets under management as of Dec. 31, announced that it would require the boards of companies that it owns in the S&P 500 and Russell 3000 indexes to have at least one racially or ethnically diverse member. The firm will vote against or withhold from the re-election of the nomination committee chair for firms that do not satisfy its requirements. It also requires boards of large-cap companies it owns to have at least 25% female representation, with an expectation to raise that threshold to 30% by 2030.

"We feel like these metrics are good ways for us to continue to engage with management and push for change," said Fionna Ross, Philadelphia-based senior ESG analyst-U.S. equities at abrdn. "At the start of the year, we wrote to the companies that we invest in and told them of the change and that we were aware of where they stood and we got a lot of good information about how companies plan to improve."

Abrdn also acknowledged that it was important to align its internal DEI efforts with its proxy guidelines for investee companies.

As such, the firm recently started reporting its EEO-1 data, a set of U.S. employment data that includes workplace demographics including data by race/ethnicity, sex and job categories, which is in line with its proxy policies.

EEO-1 data is used by regulators, investment managers and other investors to compare a company's efforts on DEI because it is a uniform set of data companies with more than 100 employees are required to report. Ms. Ross also notes that the firm's global workforce is approximately 46% female and its board is 45% female. Racial and ethnic diversity numbers have a way to go but are catching up. Abrdn has a target for ethnic minority board representation of 18%, which as of June 2021 was at 9%, according to its Diversity and Inclusion Report 2021.

"We are holding ourselves accountable. A few years ago, like our peer firms, the numbers weren't that great," she said. "But we are working to make improvements to our global workforce. We wouldn't have to vote against ourselves today, but there is still work to do."

Other firms are also looking at their vendors in an effort to build continuity with their diversity goals.

"I think there is an opportunity for everyone to do more. As a firm, we are working to improve, but asset owners could put more pressure on us and the industry as a whole — it will make the change happen faster," said Shundrawn Thomas, Chicago-based president of Northern Trust Asset Management, with $1.3 trillion in AUM as of Dec. 31. "I think the industry likes continuity, investors like continuity, but it's important that we aren't using that as an excuse."

In 2018, Northern Trust Asset Management instituted a diverse broker program to extend its diversity efforts into its vendor relationships. Mr. Thomas noted that the firm first set an explicit target of having at least 10% of asset management's overall business handled through the diverse broker program. In 2021, that target increased to 15%. Currently, approximately 18% of trading and execution is handled with diverse brokers. "We not only have been able to increase the number of participants in the program, but the amount of business we do with participants in that program has increased about sixfold," Mr. Thomas said.

Some asset managers have opted to set aggressive internal targets in order to make change happen faster. In 2019, Boston-based GW&K Investment Management, with about $50 billion in AUM as of Dec. 31, launched a recruitment effort with the goal of having 50% of candidates be from diverse backgrounds. The firm met that target and Lewis Collins, partner and general counsel at GW&K, said that the process will continue to evolve. Mr. Collins is working with an internal team on DEI policies and initiatives at the firm.

"We're the first to admit that we're probably not going to get everything right immediately," he said. "We set what we thought was an aggressive goal and we did meet that in terms of diversifying the hiring pool. Firmwide, we're at approximately 30% women and a little bit more than 10% of our company are people of color. There is more to do but we are engaged on these issues and are working to continue bringing new people on board."

Other asset managers that are further along in their process are working on ways to not only diversify headcount, but also reinforce equity and inclusion. Active manager Man Group PLC, with $148.6 billion in assets as of Dec. 31, is working with organizations like the U.K.-based 10,000 Black Interns, which helps with recruiting early career professionals. The firm also has what it calls a "returners" program, which brings back midcareer professionals — largely women — who have taken career breaks and want to return to the workforce.

Robyn Grew, Man Group's New York-based global chief operating officer and head of ESG, said that with all of these programs, the firm provides a path for diverse candidates to make it to trading and/or management positions wherever they are along their career path.

"As a senior management team we're evaluating every critical role in the firm every six months," Ms. Grew said. "We're looking at pipeline and succession and diversity is a key part of that examination. So we're looking at candidates and determining who is going to need development in two to five years, who is going to need development beyond that and how we can continue to enrich that process by bringing more diversity into every level of the organization."

Overall, Man Group has reached approximately 25% female representation in senior management and plans to increase that to 27.5% for 2022. In 2020, the firm achieved gender parity on its board, and there are ongoing initiatives to improve racial and other diversity metrics as well. "We are a listed company so we're living this as an issuer. We're in line with the proxy guidelines and are working to go beyond those targets," Ms. Grew said.