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“The finance industry has been too white and too male for too long. That needs to change,” says a recent op-ed by Roy Swan, the Director of Mission Investments for the Ford Foundation. Swan cites the statistic that women and people of colour manage only 1% of the $71trn (€58.2trn) in US assets under management. But, he said a study from the National Association of Investment Companies (NAIC) and Harvard Business School professor, Josh Lerner, found that diverse managers performed as well as, or better than their white counterparts.
The NAIC study cites a host of other statistics, including another study which concluded that women comprise just 11% of investment decision-makers at venture capital firms, while black and Hispanic employees represent just 3% and 4% respectively. It is no better in private equity (PE), where other research found that in 2019 women-owned PE firms accounted for 5.25% of all PE funds in existence, while minority-owned private equity funds comprised an additional 3.8%, controlling around the same, or even less actual PE AUM.
While gender diversity is already high on the agenda for many investment firms, racial and ethnic diversity is all but ignored, despite the level of social protest in summer 2020 after the US police murders of African Americans. UK pension consultancy, Redington, surveying 100 fund managers globally with more than $1trn in total assets, found that 56% of firms said they do not collect data on race among their employees. Of the 44% that do, 52% have no black investment team members, which suggests that, among those that do not collect data, the number with no black investment managers is likely to be even larger. Of all the diversity factors used to evaluate success, said the report, race is seen, shockingly, as the least important, with less than two-fifths of managers selecting it.
Yet another report from Willis Towers Watson shows one way forward: engagement. The report notes that measuring diversity by solely looking at ownership statistics fails to capture diversity throughout organisations, so both sets of data must be collected and analysed. Progress in what the report has decided to call I&D (inclusion and diversity) rather than the D&I used by the rest of the world is, it says, disappointingly slow, not just in asset management, but also in investment consulting, “and hence our own organisation too”, it admits.
While the report suggests a number of actions that can be taken to improve diversity in investment management beyond engagement, it also says that imposing targets is unhelpful: “given the various states and challenges each firm may be facing.” It adds: “However, we do seek to challenge them to establish plans or targets and hold them accountable if they do not demonstrate progress in the timeframe noted.”
While the level of racial diversity is slightly better among ESG investment managers, it is still not good. As RI reported back in January 2019, white people represent 79% of the employees of US SRI/ESG funds, compared to 59% of the wider population, according to a survey, titled: Racial Disparities in the Workforces of Sustainable, Responsible, and Impact Investing Mutual Funds by Danielle Burns, Sonya Dreizler, Hannah Lucal and Renee Morgan, four SRI professionals.
But action is being taken.
According to Bahiyah Yasmeen Robinson, founder of VC Include, a platform for impact fund managers with a focus on diverse emerging managers, specifically women-led, the diversity challenge comes via the numbers of potential hires. VC Include’s focus is on working not just with diverse fund managers but also focusing investments on women-led firms and people of colour-led firms.
Robinson says only 2% of current financial institutions and PE and venture capital firms are investing in black and Latinx firms; and there are even fewer investment managers from these communities – so the pipeline is really not there. Robinson says that the people who are developing diverse investment professionals “need to focus on a culture change and an intention within the firms to be more inclusive at the investor level”.
“In the last year alone, particularly in the US with the Black Lives Matter movement with the murder of George Floyd,” says Marieke Spence, Executive Director of Impact Capital Managers (ICM), the impact funds association: “there has been a total awakening in a lot of institutional investors that they have a problem and they need to change their power structure and the way their workforces look (in addition to their investment portfolio). In the same way, the impact investment industry needs to put its own house in order and make sure that we fix these enormous disparities because, not only is there a moral imperative to do it right, there is also a business case to be made.”
Spence adds that not just foundations but other larger institutional investors, such as GCM Grosvenor, a US alternative asset management firm with over $55bn in AUM, are committing to moving more capital into funds with diverse managers. US-based investment advisor, Cambridge Associates, and Yale University’s investment office have also made impressive strides, she says. “For our part, Impact Capital Managers has joined forces with other membership networks – the Intentional Endowments Network, Confluence Philanthropy, The ImPact, and Social Venture Circle – to form what we are calling the Racial Equity Investing Coalition, in an effort to examine all the tools at our disposal and share strategies to advance racial equity.”
Spence also points to sustainable investments advisor, Cyan Capital Partners, which has a revenue share model with emerging managers and places a high value on diverse emerging managers. Another new US platform for emerging managers, particularly those with diverse partnerships, is Recast Capital, which seeks to provide these managers with institutional-grade support and capital.
There is clearly a long way for even ESG and impact firms to go, but the direction is at least starting to take shape.