- June 2023
- Private Markets
- Climate Change
- PRODUCTS & INITIATIVES
- GREATER CHINA
- PRIVATE EQUITY PANORAMA
- JAPAN REPORT
- DIGITAL ASSET MANAGEMENT
- SINGAPORE REPORT
- DIVERSITY, EQUITY AND INCLUSION
- INDEXING STRATEGIES
- C-SUITE INTERVIEW
- SWITZERLAND REPORT
- CLIMATE CHANGE
- SEARCH DIRECTORY
- ROAD WARRIOR (HYBRID WORK)
- JUNE 2023 E-MAG
- GOING PLACES
The DE&I debate
Diversity, equity and inclusion (DEI) is becoming as influential an acronym within the asset management industry as ESG. The call for a broader and more inclusive approach to both staffing and internal policies, and asset management and client relations, is growing more pervasive. But how much actual progress has been made in DEI policies within the sector? How are such policies instituted? And what, if anything, have they delivered in the way of benefits and material improvements?
In the US at least, these questions have moved from the business to the political arena. Florida Governor Ron DeSantis, who has just launched his bid for the Republican presidential nomination for 2024, has signed legislation defunding DEI programs in Florida’s public universities. In response, the National Association for the Advancement of Colored People has issued a travel advisory for Florida, declaring that the state has become “openly hostile toward African Americans, people of color and LGBTQ+ individuals”. Perhaps this makes it more important than ever to address the merits of DEI.
The significance of DEI
Market advisors and observers seem convinced that the asset management industry needs DEI. McKinsey & Company has conveniently just released an article entitled “It’s (past) time to get strategic about DEI”, presenting analysis of progress to date, alongside guidelines and blueprints for organisations actually aiming to introduce effective DEI initiatives. This comes just weeks after Corporate Compliance Insights released another article entitled “The asset management industry needs to make DEI more than an HR buzzword”.
The asset management industry clearly still has some distance to go in some eyes. “Qualitative and quantitative research has proven for decades that there is a business case for greater gender inclusivity,” remarks Nick Pollard, managing director, Asia Pacific at the CFA Institute. But he adds that it “remains shocking that an industry that prides itself on diversification within its investment strategies has such a challenging time applying this principle to teams.”
According to John McCareins, head of Asia Pacific at Northern Trust Asset Management, DEI “is a vital part of our industry”. In particular, he cites a diverse and inclusive workforce as an important draw for recruiting, retaining and promoting top talent, creating “greater value for our clients, shareholders and communities”. Natalie Gill, head of DEI strategy and industry engagement at PGIM, cites DEI as a prerequisite “for success and outperformance, rather than a compliance exercise”. The rationale behind this is that deep investment knowledge and understanding are the drivers of outperformance, she explains, “which we can only do if we have the best and brightest of all identities and backgrounds informing those investment decisions”.
Research shows that diverse and inclusive communities and organisations “are stronger and more sustainable”, according to Raymone Jackson, head of diversity, equity & inclusion at T. Rowe Price. Organisations are driven to value difference and equity by public sentiment, changing corporate cultures, and client expectations, Jackson adds, but the mechanisms once put in place “allow organisations to bring more creativity, innovation and thought leadership to both investment and business decisions”.
Statistics certainly confirm that asset managers are being compelled to implement DEI policies by their clients. Data analytics firm Coalition Greenwich, in its March 2023 survey “Top Trends in Institutional Asset Management for 2023”, found that, out of its poll of some 2,000 asset owners, over 50% asked for information on DEI policies from their prospective asset managers. The sustained belief that greater DEI means better performance appears to be a key driver in those inquiries. And if over half the potential client base is looking out for DEI policies, can asset managers really afford to ignore them?
As Gill puts it, “just as any portfolio needs securities with different behavioural characteristics to improve returns and diversify risks, we also need team members who bring different perspectives to the table to optimise outcomes”. Hence, asset managers need DEI to perform.
Appropriate policies adopted
Once the case is made for DEI, the next step is to implement the appropriate policies to secure it. This may not be as simple as an aspiration, given that significant cultural and structural shifts within an organisation may be needed. McKinsey, indeed, has produced an analysis of the different “failure modes” that organisations fall into when failing to institute effective DEI policies, namely establishing DEI policies without clear starting baselines, wasting effort through policies that are too incremental, and measuring outcomes inconsistently. Such approaches, McKinsey emphasises, are liable to lead organisations to waste considerable time and effort – and are still all too prevalent, degrading overall levels of DEI achievement in the broad economy.
Gill echoes the view that “capturing the data isn’t enough; it’s how the data is used that adds value and drives change”. This is where many organisations get stuck, she affirms. And major groups that span multiple regions nationally and internationally need to capture and address different data for different regions, especially regarding ethnic diversity and inclusion. Such data, once captured, attracts increased attention from potential clients, she adds.
In contrast to its list of failure modes, McKinsey lists its five “As” to achieve successful DEI strategies: Aspire: Align on the vision; Assess: Build the fact base; Architect: Develop the plan; Act: Mobilise capabilities and resources; and Advance: Measure progress to scale and sustain momentum. The systematic and data-driven detail of these policies demands time, McKinsey stresses – “it can take companies several years to see widespread, significant progress” – as well as collaboration, with all levels of the organisation enabled to give input and feedback. Jackson, meanwhile, highlights the importance of transforming recruitment and sourcing policies, as well as processes in the talent management cycle, to address the priorities of DEI.
There is a special need to encourage asset management companies to improve diversity within senior management ranks, Pollard believes, “given the significant barriers facing women who want to pursue financial careers”. In his view, both mentorships and sponsorships are powerful tools to achieve this, as well as gender diversity tracking in talent acquisition and development.
McCareins goes on to highlight the importance of instituting accountability for DEI at the most senior levels within an organisation. Leadership needs not only timely and accurate information on the entity’s DEI benchmarks and milestones, but also training and education to improve understanding of the issues. He also points out the value of working with external bodies and partners committed to the particular areas of DEI being addressed, as well as establishing internal councils and working groups to tackle these areas.
“Above all, meaningful progress requires dedication”, McKinsey concludes. The time and effort involved requires continuous commitment, as well as the feedback mechanisms that can track the results of projects and ensure that thinking and implementation are fine-tuned and personnel informed and educated, as progress towards a full DEI strategy within the organisation continues.
Benefits of DEI
Proponents of DEI are clearly not soft-pedalling the commitment and resources required to institute successful programs. How proportionate are the benefits? This is not a question that DEI advocates appear afraid to address, but it certainly requires answering, not least when policies are so geared to data and measurable outcomes.
Gill marshalls research to demonstrate the benefits of DEI in asset management. This includes improvement in the quality of decision making, the avoidance of groupthink, and the quality of innovation. She cites Deloitte figures showing that enterprises with inclusive cultures are up to six times more likely to be innovative and agile. Furthermore, she adds, other research has indicated that gender diversity at leadership levels increases financial performance by 25%, while comparable ethnic diversity increases it by up to 36%.
Johnson stresses the value of “diverse teams and an inclusive environment where everyone feels a sense of belonging” for delivering the best business value and performance for clients. This emphasis on inclusion, he adds, “can also strengthen engagement and retention”, a positive outcome for both business and clients. Gill confirms that “diversity by itself doesn’t generate these results” – a sympathetic and positive environment where employees’ views are received and respected is equally important.
According to McCareins, “it is imperative to continually commit to fostering an inclusive environment”, where members all have an opportunity to contribute to the success of the organisation and beyond. He adds that the need for sustained and meaningful commitment to DEI can be facilitated by adopting methodologies such as the Diversity Impact Assessment (DIA).
Pollard acknowledges the benefits of cognitive diversity and greater competence in problem solving from diverse viewpoints. Moreover, he sees DEI benefits in the context of broader perspectives on the position of companies in society as a whole. “CEOs now realise that they are catering to a wider array of stakeholders today than the traditional shareholders. In order to attract the best staff and the right investors, they need to show they understand that capitalism must contribute to a more inclusive society.”
DEI in Asia
DEI is still a relatively young strategy in the West. Asia is often seen as lagging behind Western economies in such areas. Whatthen is the state of DEI in Asia, and how effective – and even appropriate – is it?
By some metrics, asset management in Asia in fact compares fairly favourably to other regions in DEI. Coalition Greenwich’s mid-2022 survey “Global Asset Management: Can DEI have an impact on AUM?” found that Asia had the highest ratio of all of asset owners who said that DEI was “extremely important” in manager selection, at 21%, compared to 18% in the US, 8% in the UK, and just 5% in continental Europe. The Asian percentage of asset owners who consider DEI as “somewhat important” was also broadly comparable with all Western markets, at 42% versus a global average of 40%. Nonetheless, the same survey shows that some 58% of US financial institutions have created dedicated DEI departments or units – compared to less than 20% in continental Europe and Asia.
Pollard observes that, in Asia, “while there are more women working in the investment industry, there seems to be a significant promotion gap for women in Asia Pacific compared to the rest of the world”. This glass ceiling issue, he feels, is one that needs to be addressed, beginning with “commitment at the highest levels of an organisation”.
Although it is important to contextualise the different local, regional, and cultural variances worldwide, Gill avers, she sees Asia having a potentially leading position in driving inclusive environments, as the region contains nearly 60% of the global population “and is an ecosystem of different cultures”. She also feels that gender and ethnic diversity “are big opportunities”, spotlighting the acute focus in Japan, for example, after Prime Minister Shinzo Abe’s announcement of his Womenomics policy a decade ago. Singapore and Hong Kong, and similar markets, meanwhile, could lead on ethnic and racial diversity. Worldwide, she adds, “systemic bias driven by centuries of social hierarchy and colonialism” has created barriers that need to be dismantled inside and outside the workplace.
McCareins confirms that DEI is an emerging discipline in Asia Pacific, but that it has been gaining momentum in recent years. He emphasises too that, “working in Asia Pacific, we cannot adopt a one-size-fits-all strategy”. Asia Pacific’s highly heterogeneous markets mean that each one “is at a different pace when it comes to the adoption of DEI”. That said, he sees increasing recognition among leaders in the region of the neglected talent pools that could furnish future leadership, “even if this translates to overcoming long-established norms”.
Johnson likewise opines that, like many global and strategic efforts, “DEI across Asia requires a specific focus to ensure that the plan is rightsized for the needs of the region”.
This includes focusing on any important cultural considerations in the region that must be honoured. Regional leadership forums can be important in terms of continuing to drive DEI implementation across the region, he adds.
There is also the regulatory and compliance side to consider. Legislatory initiatives regarding diversity and inclusion “are not as advanced here as they are in North America or Europe”, McCareins notes. In his view, this makes it all the more important for business and financial leaders to set the pace themselves to drive a change which ultimately is essential for business success, as well as beneficial on many other levels.
“We have an important role to play in helping more people achieve economic empowerment by raising awareness of the varied career opportunities across the sector, especially to those from socio-economically disadvantaged backgrounds”, Gill concludes. But she adds, “there is still work to do globally to ensure that the industry has a sustainable, competitive approach towards inclusion.”
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