The senseless death of George Floyd, captured in 8 minutes of horrific cell phone video, has given new urgency to Black Lives Matter and protest against structural inequalities stemming from systemic racism. Here in Canada, the death of Rodney Levi was another tragic example of the violence faced by First Nations communities when interacting with the police. It is clear that our societies must recognize and then urgently begin to work to remedy the many inequalities endured by our Black, Indigenous and People of Color communities.
We believe that one outcome of our changing societies will be a rapid and mandatory shift for asset management companies to demonstrate tangible, committed and effective actions to improve the diversity of their businesses (be it racial diversity, gender diversity or through other lenses which display their commitment to an inclusive culture at their firm). Put simply, asset managers / GPs will not be able to raise capital from institutional investors if they do not show a commitment to building a diverse, socially inclusive business.
To be clear, we are talking here about the asset manager's own business, not how the firm manages it's investment decision making process, or what investments are thereafter included in portfolios. So, who owns the business, who are the executive managers, middle management and more junior staff; who is recruited, who is promoted, and who leaves / who is fired. And then, what policies and procedures are in place to improve diversity and seek to drive the asset manager in a direction which is more socially inclusive?
Many large institutional investors maintain several hundred asset manager relationships across their portfolios: from the perspective of the investor, asset managers are part of their supply chain. And this is the key point - in 2020, no business in any sector of the economy can turn a blind eye to who they do business with, at every level of that supply chain. This certainly applies in asset management, as institutional investors focus ever more on the need for better alignment between their own culture and values and the culture and values of the managers they hire "downstream".
Why do we say this? It does often strike us that the alternative asset industry, in particular, forgets who their clients are. Hedge funds are no longer the secret club of the super rich as they were in the (much smaller industry) of the 1980s and 1990s. Hedge funds and private equity funds are now primarily dependent on institutional investors - sovereign wealth funds, public pension funds, private pension funds and other sophisticated asset managers. And, PE and hedge fund managers must remember that the "client" is not the investment team at that pension fund - the actual asset owners are the tens or hundreds of thousands - or millions - of members themselves. Boards of Trustees, Directors and Governors who run institutional investment entities (and to whom each CIO reports) are acutely aware that many of those members are forcefully committed to taking action against systemic racism - and that those members expect the same commitment in how their pensions are managed.
The Australian Superannuation industry is a great example. As members retire, the key to super fund growth is to attract new members, especially at the beginning of their careers. For Aussie super funds, Millennials and Generation Z customers now entering the workforce are looking for innovative products committed to delivering across E, S and G. And those potential customers will ask tough questions - what percentage of your managers are managed by people of colour? How many managers are led by women? Does the super fund have a statement about their commitment to diversity, but then go ahead and hire asset managers who are pretty much exclusively white? What actions is the super fund taking to improve those metrics? (It also goes without saying that many "boomers" invested in those super funds are equally as committed to Black Lives Matter, and will be asking the same questions.)
And where is the asset management industry?
In November 2017, the Money Management Institute collaborated with FundFire to release a study on ethnic and racial diversity. At the most senior levels of our industry, the survey found:
"Out of 209 professionals in global executive committee positions, only 6.7% are Asian. Black and Hispanic professionals each represent just 2.4% of executive-committee level employees, with only five black executives and five Hispanic or Latino executives at this level across the survey sample."
Meanwhile, The Washington Post recently wrote about the Venture Capital Industry:
"only 1 percent of venture capital dollars went to black start-up founders in 2018, according to a study conducted by Silicon Valley Bank and others. The number of black decision-makers in venture capital in 2018 dropped to 1 percent — representing just seven black people at the 102 largest venture capital firms in the United States, according to an annual survey by the Information, a tech-news outlet."
The lack of racial diversity in the financial industry is equally a problem in the United Kingdom. This was illustrated in a report by the Investment Association which found that only 2% of 3,755 investment management staff surveyed were from African and Caribbean backgrounds (despite these communities representing 13% of London's population). The numbers decrease still further as we look at more senior levels of the industry: just under 1% of 650 investment managers surveyed identified as Black, African, Caribbean and Black British.
Gender diversity remains a critical problem in the asset management industry and very much a work in progress. In addition, it is time that asset managers rapidly make efforts to improve the experience of racialized individuals. This necessary work will often require uncomfortable conversations within asset management firms to identify where their own practices perpetuate inequality. Recruitment is seen as the relatively easier thing to address. However, retention and promotion require further changes in the structures within each company.
The Investment Association identified some practices that could help build Black representation in the industry. These include training around inherent biases to help leaders in a firm, as well as staff in recruitment, be more aware of their own assumptions in the decisions they make. Additionally, building links with local communities can increase the interest in careers in Investment Management and support recruitment. Subsequently, mentoring and reverse mentoring programs for identified future leaders can help drive skills and promotions to more senior levels of the organization.
To attract mandates, managers could - and should - rapidly pivot to looking at their own firms, making changes, and communicating those actions to investors. Again, changes should be tangible, and show direct impact over time. Investors, in turn, will welcome the chance to share good ideas, policies and examples of outcomes they have seen elsewhere across their roster of external managers.
Indeed, for a forward looking asset manager, leading change to meaningfully improve diversity is an opportunity to grow your business. Take action and prove how your leadership on diversity means you are stepping forward faster, with more commitment and impact, than your competitors.
Equally, more data, more reporting and more transparency is needed. Castle Hall's Responsible Investment Manager diligence work for our clients - part of our ESG Diligence service - currently reports that 64% of the asset managers on whom we have conducted ESG due diligence declined to state whether they had been subject to any actions, claims or investigations in relation to workplace behaviour. Such claims could be the result of allegations of sexual harassment, racism or discrimination due to sexual orientation or religious affiliation. Going forward, adequate transparency around these topics will be mandatory if any institutional investor is to be able to justify their decision to allocate member capital to an external asset manager.
The changes in this new decade will be profound with, of course, Covid bringing its own reset across so many aspects of our personal and professional lives. What asset management thought was business as usual has gone.
It is time for change.
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