Part 1: Diversity, Equity and Inclusion

About the 10x10 report

In 3Q 2021, Russell Investments held its annual Partner Innovation Lab, a roundtable event where large asset owners from various countries brainstorm their greatest concerns and areas of interest. We asked Cerulli Associates to interview participating organisations as well as some of our asset management partners, to extract individual perspectives on topics discussed at the event.

The result is a three-part series:

Participating institutional investors included the following corporate retirement plan sponsors, in alphabetical order: The Boeing Company, Fujitsu Global, Mazda Motor Corporation, Microsoft, Mitsubishi Electric, Nestlé, Roche and Unilever. It also included the following non-profit investors: The New York Presbyterian Hospital, Robert Wood Johnson Foundation and Thomas Jefferson University.

Participating alternative asset managers included: Brevan Howard, Hamilton Lane and Oaktree Capital Management. Participating fixed-income asset managers included: BlueBay Asset Management and Western Asset Management Company. And participating multi-asset-class managers included BlackRock, J.P. Morgan Asset Management, Morgan Stanley, Putnam Investments and Wellington Management.

The general consensus among participants was that while external demand drives climate-change measures, DEI is often driven by internal pressure, as both asset owners and asset managers believe that diverse teams lead to better outcomes. That’s not to say there is no external pressure. For institutional investors, external demand comes from end-beneficiaries and, in the case of corporates, clients that their sponsoring organisations serve. For managers, external demand generally comes from institutional clients.

That said, internal pressure was seen as the greatest driving force for DEI. Most organisations say the need for additional diversity has generally arisen through company and team meetings. Several said their younger employees are particularly focused on diversity efforts.

While most asset owners and managers have some sort of grass-roots initiative, many also cite organisations’ leadership driving the push. This often takes the form of the CEO, board of directors, or an executive committee making diversity a firm-wide objective. Besides communicating to the firm that diversity is an important initiative, the top of the organisation may incentivize diversity via executive compensation. One manager with whom Cerulli spoke explained that 5% of executives’ bonuses were tied to improvements in their teams’ diversity metrics. Another manager said that rather than tying specific employee bonuses to team diversity, the firm’s overall bonus pool was partially determined based on improvements in diversity. Another top-down measure that regularly surfaced in interviews was firms requiring diversity training for hiring managers to ensure the managers are aware of their own biases.

One of the key challenges stated by both asset owners and managers was simply defining DEI. They must define diversity before they can promote it, and they must also define what constitutes success. Most 10X10 participants define diversity in terms of gender, race, and ethnicity, and they generally set goals for diversity (or set aspirational benchmarks) based on the diversity metrics of the country in which the hiring office is located.

Nearly all participants also mentioned diversity of backgrounds, circumstances, age, and sexuality. No participants mentioned religious diversity as a measure they evaluate. When 10x10 participants mentioned the promotion of sexuality diversity, this was geared more toward inclusion measures than diversity.

Some asset managers described efforts to benchmark themselves against industry peers. Some asset owners and managers told Cerulli that they do not have specific diversity benchmarks or targets. These organisations are more directional, taking the approach, “We just need more.” While they are not necessarily behind in considering diversity measures, these organisations tend to be further behind in achieving results.

From the experts:

While many asset owners traditionally evaluated the DEI of asset managers based on ownership, some are now broadening their focus to managers’ entire organisations. One asset owner initially assessed the DEI of managers in its public investment portfolio, then expanded to private investments. Notably, multiple asset owners mentioned that measuring diversity in the alternatives space is more difficult than it is for traditional managers due to the lack of reporting requirements. Finally, a select few asset owners have gone so far as to evaluate diversity at holdings/portfolio companies of funds.

Most organisations do not have formal policies for diversity - it is simply a consideration in the overall process. And some asset owners look for managers that are making progress on diversity initiatives rather than judging them on their level of diversity at a given point in time.

From the experts:

Asset owners that didn’t have approaches to assessing DEI externally mentioned that they intended to start this initiative by talking to their investment consultants or OCIOs. Some of these asset owners are in the brainstorming stage, trying to discover ways to assess and implement diversity measures. They rely on these types of partners to educate them on initiatives of other clients. By using intermediaries, these investors can discover best practices.

A broad takeaway from this research is that promoting diversity requires proactive behaviour. To take on a comprehensive approach, an organisation must define diversity, set goals or objectives, implement measures to carry out those objectives, and employ systems to track progress. An organisation must also maintain an inclusive environment for it to tap into diverse perspectives. Another takeaway is that diversity is not free – an organisation must devote resources to acquire and maintain it or, alternatively, absorb a substantial opportunity cost.