Current protests over police brutality of Black Americans and racial inequalities in the US are propelling conversations around diversity, inclusion, and racial equity in the investment management industry. As a result, institutional investors are taking actions to advance diversity and inclusion in their portfolios. These steps range from increasing the use of diverse fund managers to investing in socioeconomically marginalized communities of color that traditional capital markets often overlook.
4 Ways Investors Are Advancing Diversity and Inclusion in Their Portfolios
1. Engaging Diverse Fund Managers
One major area of focus for institutional investors is hiring more diverse investment managers. For example, the New York City Employees’ Retirement Systems and Comptroller’s Office established an Emerging Manager Program in 1994 in order to identify and invest with fund managers committed to diversity in everything from their ownership structure to compensation. Ultimately, the program’s aim is to support managers who would otherwise lack access to large institutional investors. The New York City Systems also recently created a M/WBE Broker Dealer Program to boost the number of minority- and women-owned brokerage firms used by investment advisors that Systems works with.
Through its own Emerging Managers Program, the WK Kellogg Foundation has placed $205 million (as of 2019) with firms owned by women and people of color with the goal of developing new fund managers so they can manage more of the Foundation’s portfolio. In addition, when a search for a manager takes place, the priority is to consider at least one minority-owned firm.
Another approach to hiring more diverse managers is through policy requirements. In 2019, investment consulting firm NEPC developed its Diverse Managers Policy, which mandates that diverse managers represent 10% of its placement list by 2021. To that end, the organization plans to boost the number of meetings with diverse firms by 10% this year and provide prompt feedback after initial meetings.
To learn more about investing for diversity and inclusion, read Racial Equity Investing: Opportunities for Impact & Alpha.
2. Investing in Entrepreneurs of Color
Large investors are also seeking investments that support diversity and inclusion and reduce systemic bias in the financial system. For example, in 2008 Kellogg introduced a mission-driven portfolio committing $100 million from its endowment to help identify and invest in opportunities that traditional capital ignores.
Five years ago, Kellogg made a $3.5 million loan, along with $3 million from the JPMorgan Chase Foundation, to launch the Entrepreneurs of Color Fund in Detroit. The fund has since more than tripled to $22 million, and the program has been replicated in Chicago, San Francisco, New York, and Washington, DC.
3. Collaborating and Applying Pressure
Organizations also are creating forums to foster discussions among institutional investors about promoting diversity and inclusion in investment decisions and among their own ranks. For instance, NEPC recently introduced its Investment Diversity Advisory Council, which convenes with institutional investors to explore measurable ways to boost diversity in leadership and beyond, discuss best practices, and share data-driven strategies to track progress. Sessions are led by NEPC’s Diverse Manager Committee, which also identifies qualified diverse investment firms.
Other investors are coming together with asset owners and business leaders to move the needle on diversity and inclusion. Endorsed by a broad range of investors, associations, and individuals, Racial Justice Investing has coalesced around five calls to action, from amplifying Black voices to promoting anti-racist public policy. According to the group’s statement, signatories “commit to hold [themselves] accountable for dismantling systemic racism and promoting racial equity and justice through [their] investments and work.”
4. Diversifying Hiring and Recruitment
At the University of California’s endowment, diversity is one of the eight pillars of UC Investments’ Framework for Sustainable Investing, which was adopted in 2015. In 2019, the organization stepped up its commitment to diversity and inclusion by not only tracking the demographics of investment partners but also prioritizing recruiting and hiring diverse investment employees. Because a structured, consistent hiring process is seen as a key aspect of advancing diversity and inclusion, the organization systematized its hiring process by focusing interview questions on factors that directly affect job performance, among other steps. It also piloted a requirement that candidate pools be diverse before the hiring process can advance.
In other cases, organizations are using their leverage as shareholders to drive diversity in hiring at companies they invest in. In 2019, the New York City Systems asked companies to establish policies mandating that they consider women and people of color when hiring board of trustees members and CEOs. Pensions & Investments notes that the approach is similar to the “Rooney Rule” of the NFL, which requires teams to interview diverse candidates when a front-office job is open. With that in mind, the pension system also has filed shareholder proposals at companies lacking racial diversity among their top executive ranks.
The Business Case for Diversity and Inclusion
A fundamental step investors are taking is to make the business case for inclusion and for intentionally addressing implicit racial bias. Kellogg argues that reducing bias is aligned with investors’ interests, and not considering matters of racial equity actually increases risk. This is because implicit racial bias can cause investors to wear blinders, not only missing out on effective fund managers but also overlooking the upside of investing in companies with racially inclusive businesses and offerings. That, in turn, contributes to the further erosion of wealth in many communities of color and more intransigent income inequality.