Measuring asset managers’ DEI devotion

Growing demand by asset owners for detailed, transparent information about diversity, equity and inclusion practices in investment management has pushed industry groups to create a variety of DEI metrics.

“Some of us hammered the table for years to see if we could advance diversity in the money management industry and the answer was no,” said Lauren Mathias, senior vice president, non-U.S. equity investment consultant in the global manager research group and the diversity, equity, belonging champion at investment consultant Callan LLC, San Francisco.

Reckoning with racism following the protests of 2020 spurred more interest in diversity among asset owners. “George Floyd was a catalyst” for diversity after his death in 2020, Ms. Mathias said, noting that the level of interest in DEI by asset owners is “very high now, which means we need to measure the entire investment industry.”

Increased attention to emerging and diverse managers has also been spurred by compulsion — although for Jose Gonzalez, investment officer-diverse and emerging managers at the $66.1 billion Teachers’ Retirement System of the State of Illinois, Springfield, the issue is about more than meeting or exceeding a state law that sets an aspirational goal of 20% of public plan assets should be invested with emerging managers and diverse firms.

The system’s diverse manager portfolio totaled $18 billion or 27% of plan assets as of March 31.

“There’s no standardization in the industry to compare money managers against a diversity benchmark and it’s really needed,” Mr. Gonzalez said, stressing “we need to hold managers accountable for their DEI practices and keep pressure on them to improve.”

“Diverse managers are performing just as well as non-diverse firms. This will be a five-, 10- or 20-year effort to make a difference to utilize more diverse managers,” he said.

DEI practices in the industry are beyond the beginning stages but “still are no further than the third inning,” Ms. Mathias stressed, adding “investment managers are in a new paradigm and are providing more data in response to investor demand, but more is needed.”

Ms. Mathias said Callan updated its manager database and enhanced its data collection practice in July to make measuring the demographics of asset managers more straightforward and to get information about firms’ diversity policies and procedures, given their clients’ interest in DEI metrics. “Everyone needs a standard to look to for DEI. It’s a very important measurement for investors,” she said.

Investment industry organizations that have created digital DEI surveys, guidance and reporting standards include the CFA Institute, Charlottesville, Va., which launched its Diversity, Equity and Inclusion Code for the Investment Profession in the U.S. and Canada in February. The 27 signatories — asset owners, money managers and investment consultants — to the code as of April 11 committed to reporting three major steps they have taken to improve their DEI practices within the first two years after signing the pledge or they will no longer be a signatory.

The CFA Institute’s insistence on holding money managers accountable for improving their DEI practices is “very powerful. It’s important that signatories are held to their promise,” Callan’s Ms. Mathias said.

One of CFA’s reasons for insisting on manager accountability regarding DEI was to eliminate a potential “bifurcation between the money managers that are doing the work of DEI implementation vs. those that don’t and may be signing on to the code as part of good marketing,” said Sarah Maynard, London-based global head of external DEI.

Meanwhile, the International Limited Partners Association, London, offers a more targeted DEI approach — its DEI Roadmap focuses on private equity managers. The road map includes the ILPA Diversity Metrics Template for private equity firms as part of the organization’s Diversity in Action initiative.

Then there’s the Investment Leadership Network, Washington, which decided that of its three areas of focus — climate change, sustainable infrastructure and diversity in investment — the last priority needed more attention.

After review, the ILN debuted its Inclusive Finance Playbook in March. It provides two tiers of inclusion metrics — fundamental and advanced — that asset owners and money managers can use to assess their DEI policies, including talent acquisition, employee engagement and diversity data transparency.

The network’s 13 members include seven large Canadian pension funds and six money managers with aggregate assets of $10 trillion.

On the other hand, the Standards Board for Alternative Investments, London, has eschewed metrics in favor of assessing alternative investment manager culture and providing guidance on DEI issues through its Culture and Diversity Toolbox.

Despite the available choices for measuring DEI, asset owners are well aware that meaningful data still is difficult to unearth.

After completing a research report that showed a strong link between the diversity of money management companies’ ownership and the level of diversity within their investment teams, Ashley Zohn, vice president of the learning and impact program of the John S. and James L. Knight Foundation, Miami, saw the need for even more research.

The research team, which included Ms. Zohn and Candice Rosever, principal at Global Economics Group LLC, Chicago, an economics consulting firm, analyzed the results from a DEI survey conducted by eVestment LLC, Marietta, Ga.

The research also found that only 204 of the 1,096 U.S.-based non-public money managers surveyed provided data on both ownership and investment teams, the report said.

“This study underscores a common theme running through our research on asset managers: We need much more transparency and better reporting to understand the state of firm diversity so that customers can make much more informed decisions about who invests their money,” Ms. Zohn said in the report.

The Knight Foundation reported on its website that 37% of its $2.9 billion portfolio was managed by woman- and minority-owned firms as of Dec. 31. Survey data showed that firms managed by women or people of color were at least three times as likely to have diverse investment staffs vs. money managers without diverse ownership, according to the Knight Diversity of Asset Managers Research Series: Ownership and Teams Diversity Metrics report.

Sources are somewhat at odds about whether there should a single industry standard for DEI measurement.

“It’s very hard to have a single standard because each asset owner is defining DEI in their own way. It’s difficult to choose a sweeping characteristic for the whole industry,” said Judy Chambers, managing principal and private market consultant based in the New York office of investment consultant Meketa Investment Group Inc. “No one size fits all when it comes to DEI metrics.”

Other industry players disagree.

Lenox Park Solutions LLC, a New York-based technology and data science company, has created an extensive measurement platform that analyzes the impact of money managers’ DEI practices based on data collected from them.

Jason Lamin, Lenox Park’s co-founder and CEO, is adamant that “standardization of DEI metrics is not difficult. You need efficient aggregation of data in a clean format,” Mr. Lamin said.

Often at the insistence of their asset owner clients, nearly 2,000 money managers have reported their DEI practices to Lenox Park’s database. After analysis, each money management firm is assigned a Lenox Park Impact score, which measures each manager’s DEI impact on the firm’s gender and ethnicity practices as well as their ownership, leadership and total workforce, Mr. Lamin said.

“Our clients — asset owners — do want a standard DEI measure. They want granularity and they are able to go below the LPI level in our database to see more detail about money managers’ DEI practices so they can talk with their managers about them,” Mr. Lamin said.

He added that the next step toward adoption of a standard methodology will happen when asset owners coalesce around a single standard.

Lenox Park has 3,771 registered users of its DEI platform who are employees of 2,111 organizations including asset owners, money managers, consultants, broker dealers, law and audit firms and other users.

Asset owners that have solicited money manager DEI information have combined assets of more than $4 trillion, Mr. Lamin said.

With regard to metrics, the SBAI’s viewpoint is that “it’s important to remember what you are trying to measure,” said Maria Long, research and content director, in an email.

“We use race, gender, ethnicity, etc. as proxies for different life experiences so the important thing is not exactly how many people each firm has of each specific category (of employees), but whether the firm has representation from these ‘minority’ groups and, equally important, whether it has an inclusive culture that will unleash the benefits of diversity,” Ms. Long said.

“If we standardize too much, we run the risk of making this a tick-box exercise rather than allowing the flexibility for firms to find a way for them that works and helps them achieve the impact they are looking for,” Ms. Long added.