Alex Wise, Head of Australia and New Zealand for Castle Hall, this week published an article in Investment Magazine on "Put the #MeToo in Due Diligence". Alex recommends that, firstly, thorough Reputational Due Diligence screen an asset manager for any historical events, claims or media commentary which could suggest a negative reputational profile. Then, forward looking ESG Diligence can evaluate the culture of the asset manager, considering the firm's overall posture especially in key areas such as Diversity and Inclusion.
The text of Alex's article is below - once more, our appreciation to Investment Magazine for their support of commentary on due diligence issues.
For asset owners, increased societal focus on reputational risks such as diversity and inclusion and broader cultural issues such as ‘Me Too’ and workplace harassment has been a wake-up call, particularly with regards to the appointment and retention of external asset managers.
Reputational risk issues can go viral and the impact on the asset-owner’s brand through exposure to fund managers with a poor culture can provoke a swift backlash from investors. At a time when financial services participants are under the microscope, asset owners may be well advised to steer away from managers with a questionable culture.
Globally, best practice reputational diligence is evolving as a twofold approach. First, look at the prior record; has the fund manager been exposed to cases of sexual harassment or other workplace misbehaviour? This may relate to gender pay inequalities, bullying, toxic work culture etcetera.
Second, in a more forward-looking gaze; is the fund manager creating a diverse and inclusive firm that is conscious of ESG risks in the business? For many investors, the ability to retain diverse and inclusive, equally paid investment teams drives staff retention, wellness and based on published research, better performance.
However, the question still exists: what due diligence are investors doing prior to allocating to managers or to those already in their portfolio?
As a consultant in this area we see an increased global focus on cultural and social issues, such as gender diversity throughout a fund manager’s organisation. For example, leading investors will be aware of gender retention statistics and how many of the new intake of employees are female. Furthermore, is a high percentage of female leavers indicative of a systemic issue at the manager? A wide consensus has been built that diverse teams perform better and many leading investors in North America and Europe are looking into the racial and ethnic makeup of their fund managers in addition to gender diversity statistics and identify those firms leading – and lagging – industry benchmarks.
In terms of ESG diligence on the fund manager, investors should ask for details on gender composition, pay equality and (as noted above) whether there have been any cases of harassment at the manager.
On the positive side, investors can positively rate diversity and inclusion initiatives as an indication as to whether a fund manager is walking the walk on these important issues. Our research shows that 80 per cent of global managers have now created a diversity and inclusion policy: the 20 per cent who have not clearly lag their industry peers, and should be subject to investor engagement to rapidly close this gap.
Inclusive recruitment practices such as interview panels, work sample tests and unconscious bias training to staff involved in recruitment can have a positive impact on a manager’s ESG or cultural rating as these are practices indicative of a leading firm. This gives a positive score as part of our benchmark. Furthermore, fund managers that participate in development programs such as internships to increase the number of hires from diverse backgrounds are also positively rated.
It seems asset managers that have a strong cultural stance in favour of diversity and inclusion are more likely to have a culture that aligns with the expectations of many super fund beneficiaries, i.e. the members. It follows that such managers are far less likely to hit the front pages for reputational matters.
Either way, reputational risk has a wider line of sight in 2020 and a greater focus must be put on social and cultural matters at the fund manager level by leading investors. Only then can trustees and other fiduciaries demonstrate their best efforts to avoid cultural and other public relations issues inherent with taking risks on third parties.
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