Tackling the DEI disclosure gap – why no data is worse than unflattering data.

Gathering diversity, equality and integration numbers across firms and jurisdictions isn’t easy, and the problem is compounded when some opt not to disclose their data at all. But as clients increasingly prioritise diversity, equity, and inclusion (DEI) in their investment decisions, failure to disclose could mean missing out. Yoshie Phillips explains.

What is DEI integration?

In simple terms, DEI integration is the act of meaningfully incorporating diversity and equity principles into the investment process. DEI integration can come from multiple angles, such as whether the investment team exhibits a diverse pool of experience and knowledge and whether they put these attributes to good use. Sourcing and managing relevant DEI data and metrics are critical steps to assess DEI integration, yet the industry lacks consistent and broad-based DEI data availability. In addition to DEI demographic data, assessing effective DEI integration requires evaluating team dynamics, accountability, and reporting lines, as well as leadership style, seniority, tenure and job functions of underrepresented groups.

Using industry collaboration to drive change

Industry bodies are useful platforms to actively improve practices in the asset management community. For example, Russell Investments is a member of the Institutional Investing Diversity Cooperative (IIDC), which aims to encourage greater diversity in our industry by pushing for more disclosures from our peers. Membership currently stands at 26 firms with over $43 trillion under advice. We also sit on a consultant board of eVestment, a company which tackles the industry’s evolving data needs in this space.

Why are clients asking for DEI data?

Diversity, equity and inclusion are values clients are increasingly looking to prioritise in their portfolios. There is a growing interest to look beyond firm ownership to understand more about DEI programmes and policies to improve diversity practices. As the conversations around ethnicity and gender evolve in society more generally, firms are beginning to feel the pressure to open-up about their workplace demographics.

We view this a positive trend. We note that managers who consider these issues as part of their investment process often enjoy positive outcomes. An open and inclusive workplace is more likely to encourage a diversity of opinion between colleagues, which in turn fosters innovation and critical thinking. Employees who feel appreciated for their differences are more likely to stick around long-term, boosting staff retention and the stability of the investment team.

Why gathering DEI data is difficult

Improving DEI disclosure has been an issue throughout our industry. For example, only 39% of firms choose to disclose this information at eVestment, and respondents are overwhelmingly based in the US. This is partly because of differing regulation between jurisdictions and because the public discourse around ethnicity is often more encouraged in the US than elsewhere.

The criteria we apply to measure DEI could also. Large publicly traded companies, for example, come under more pressure to diversify their board memberships. However, private companies tend to have a proportionately higher representation of women and minorities than public companies. The challenge is that the definitional preference of diverse managers or investment products vary among different client bases, making it challenging to find a systemic way to blend and interpret this data for a more comprehensive take on DEI integration.

Overcoming the DEI fear factor

If an organisation is concerned that their DEI data will reflect poorly on them, they might be reluctant to share. But even a disclosure that reveals sub-par diversity statistics is still a worthy and constructive contribution to the conversation. We believe a company that is transparent about its gender and racial statistics – however unflattering - will ultimately be looked upon more favourably than one which looks like it has something to hide.

There is safety in numbers. Even a seemingly unflattering diversity statistic might actually be decent or even favourable, because the whole industry is struggling with DEI. Disclosure is just a starting point. Improving diversity is a journey rather than destination. And instead of focusing too much on point-in-time numbers, DEI analysis efforts should emphasise monitoring trendlines and long-term progress.

Self-interest has a role to play here. There is a growing number of consultants who will not include managers in their search for clients if their DEI data is not transparent. Ultimately, this may be the greatest motivator for businesses to disclose going froward, as failing to do so may mean missing out on new business.

The bottom line

The DEI discussion is ever-changing, and questions remain over how this data should be compiled and interpreted. What is unambiguous however is the direction of travel: More and more clients are asking questions and managers need to be prepared. Organisations like the IIDC are working hard to open-up the discourse and motivate industry stakeholders to take DEI seriously. Managers need to understand that disclosing this data is an important responsibility in itself, regardless of what the data says. The investment community as a whole has plenty of room for improvement. Being open and transparent is a valuable first step.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.