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Want to integrate diversity and inclusion into your investment portfolio? And you want consultants to help you? here’s how

This article, the fourth in a series on diversity, equity and inclusion in investing, examines how the investment committees and boards of directors of major institutional investors oversee the integration of diversity, equity and inclusion in investment teams and investment portfolios. What can we learn from institutional dispatcher best practices on integrating diversity equity and inclusion (DEI) into legal and governance documents, signing DEI covenants and codes, and mobilizing investment consultants to the DEI?

This series of articles is the product of a multi-stakeholder discussion among the leaders of numerous nonprofit organizations focused on diversity, equity and inclusion in investing, facilitated by Institutional Dispatchers for Diversity, l Equity and Inclusion (IADEI). It also includes the results of a survey of 18 major asset owners.

1. DEI in legal and governance documents. 28% of asset owners have DEI in their investment policy statements, 12% insert DEI clauses in side letters and 6% in LPAs. DEI language in investment policy statements tends to be general. For example, diversity of ownership and leadership, whether the company has a compelling DEI initiative and has made progress in DEI, and the extent to which the company’s business activities benefit marginalized communities can all be scored as investment considerations in investment policy statements.

DEI clauses in cover letters and LPAs focus on requiring managers to respond to DEI surveys and the presence of talent and retention policies, which tend to be associated with greater diversity.

Other asset owners include diversity as an investment belief or develop diversity statements. For example, diversity is embedded in one of the ten investment beliefs of the California Public Employees’ Retirement System (CalPERS), according to Marlene Timberlake D’Adamo, chief diversity, equity and inclusion of CalPERS: diversity of talent (including a wide range of education, experience, perspectives, and skills) at all levels (board, staff, external managers, boards) is important ; and CalPERS can engage grantee companies and external managers on their governance and sustainability issues, including diversity.

2. Signature of commitments and DEI codes. There is some skepticism about DEI pledges and codes, in part because terms of boards and investment committees tend to be shorter than the time needed to achieve a diversified portfolio.

Nevertheless, 44% of asset owners had signed DEI commitments, most commonly ILPA’s Diversity in Action initiative, which requires signatories to (i) have a public DEI strategy or statement and/or or a DEI policy communicated to employees and investment partners that addresses recruitment and retention, (ii) track internal hiring and promotion statistics by gender and race/ethnicity, (iii) set organizational goals for a more inclusive recruitment and retention, and (iv) requiring LPs and GPs to provide DEI demographics for any new engagement or fundraising. There is also a list of nine optional activities that participating organizations can choose to adopt.

Other asset owners had signed the CFA
the Institute’s new Diversity, Equity and Inclusion Code, which commits signatories to (i) promote DEI and improve DEI outcomes and (ii) increase the measurable results of DEI in the sector investment; (iii) measure and report progress toward better DEI results to senior management, the Board, and the CFA Institute; (iv) expand the pool of diverse talent; (v) design and implement inclusive and fair hiring and onboarding practices, (vi) promotion; and retention practices.

A number of UK-based asset owners have signed the Asset Owner Diversity Charter, which commits signatories to include diversity issues in the selection and ongoing monitoring of managers and to identify the best diversity and inclusion practices.

A number of asset owners, including United Church Funds, have signed the Investor Solidarity Statement to Address Systemic Racism and the Call to Action in 2020 to have concrete aspirational goals, explains Matthew Illian, Chief Investment Officer of United Church Funds. Signatories pledged to actively engage with, amplify and include black voices in investor spaces and corporate engagements; integrate a racial equity and justice lens into their own organizations; integrating racial justice into investment decisions and engagement strategies; reinvest in communities; and using the voice of investors to advance anti-racism public policy. Other endowments and foundations have signed the Confluence Philanthropy Membership Pledge, which commits signatories to discuss racial equity at their next investment committee meeting and share next steps and results to identify industry-wide barriers and technical resources needed to advance the practice of investing with a racial equity lens. Confluence Philanthropy CEO Dana Lanza notes that “we were pleased to see a slight increase in racial equity commitments in IPS among Belonging Pledge signatories.”

Some asset owners are also asking their portfolio venture managers to sign the Diversity Rider, which codifies the efforts of founders and venture capitalists to ensure a diverse capitalization table and can have an outsized impact over time. time if diversity is integrated into the culture and the team and the early stages of business development.

3. Mobilization of investment consultants to DEI. Some asset owners set minimum diversity thresholds in advisory contracts for manager searches. Although progress is slow, expanding funnels among consultants is already contributing to more diverse investment portfolios. Cambridge Associates, in particular, committed in 2020 to doubling the number of managers owned by diverse interests and the percentage of assets under management invested in those managers by 2025, according to Cambridge Associates’ Chief Strategy Officer for Diversified Manager Research, Carolina Gomez. Asset owners can in turn propel increasing diversity into consultant funnels by setting diversity goals.

The long march towards a diversified and inclusive investment value chain

Achieving a diverse, equal and inclusive investment value chain will go a long way. Collaborations such as the exchange of ideas between IADEI and its like-minded cousins ​​listed below and the collaboration within the foundation and foundation community to produce the largest open source list of grant managers. Diversely-owned and diversely-led investments that IADEI maintains demonstrate what committed peers can achieve together.

In particular, next month, IADEI and its cousins ​​will explore and share best practices and lessons learned on selecting and promoting DEI in investment portfolios. Stay tuned!

Acknowledgements: Institutional Allocators for Diversity Equity & Inclusion (IADEI) would like to thank the leaders of the CFA Institute, Diverse Asset Managers Initiative (DAMI), IDIF, Institutional Limited Partners Association (ILPA), Intentional Endowments Network (IEN), Milken Institute, One Women Initiative (OWI), Confluence Philanthropy, Standards Board for Alternative Investments (SBAI), National Association of Investment Companies (NAIC), Chartered Alternative Investment Analyst Association (CAIA), Value Reporting Foundation (VRF) and FCLTGlobal for their work to increase diversity, equity and inclusion in the investment value chain and for generously sharing their insights and expertise.

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