Diversity programmes started in the investment management industry before the topic had even reached pension funds, but can diversity efforts succeed without more pressure from asset owners? 

 

British investors, unlike their US counterparts, have no ‘women and minority-owned' label for asset managers they can commit to in making allocations. However, in 2016, the Diversity Project was created by a group of industry leaders to improve diversity in the investment sector, taking the baton handed by the 2015 McKinsey report that had first stated a business case for greater diversity. 

 

The UK investment industry’s Diversity Project was initially largely focused on gender diversity and still has a strong commitment to this, though it has also produced reports on class, ethnic diversity and LGBT+.  

 

Asset managers have since made efforts to improve their diversity, not least because of mandatory gender pay gap reporting, but as initiatives largely focus on entry level positions while those for mid-career professionals center on flexible working – which can negatively impact careers – progress across all levels in the industry is not as fast as some would like.  

 

The Financial Conduct Authority recently found that “senior levels of finance are nearly as male today as they were 15 years ago”; the proportion of women in approved person roles is just 17% in UK financial services, almost unchanged, and even slightly lower, than in 2005.  

 

Last month, an initiative to offer at least 100 internships in front office roles to black candidates was launched by mallowstreet founder Dawid Konotey-Ahulu and others to improve access to prestigious investment careers for black students. In 2018, there were only 12 black portfolio managers across the entire UK investment industry, according to thinktank New Financial; there are also significant class biases in the sector as almost two-thirds of industry leaders went to private school. 

 

 

The thinktank identified a persistent ‘meritocracy myth’ as a major barrier, whereby employers believe and tell staff that reward is based on merit, when it is in fact heavily biased towards certain demographic groups. 

 

Another issue is capturing data – not least as much of it is sensitive as defined by GDPR rules. One firm that collects detailed information of its employees is Legal & General. According to the Investment Association, the insurer and asset manager asks for gender, ethnicity, marital status, disability, sexual orientation, gender identity – giving people the option to define their gender identify – caring responsibilities and socio-economic backgrounds. From this it has developed a ‘Culture, inclusion & diversity dashboard’, to monitor and assess diversity over the employee ‘lifecycle’, to understand patterns of attrition and retention, as well as recruitment.  

 

While this represents an important step, it does not yet allow for comparability. A common data standard is necessary to improve the industry, says Chris Redmond, head of manager research at consultancy Willis Towers Watson. 

 

“We would like to get the industry to coalesce around more standard reporting definitions,” he says, admitting that GDPR poses a barrier. If these could be agreed, they would not need to focus on equity ownership like the women and minority-owned description in the US but could cover portfolio managers and the broader investment team. “By building that transparency you could bring it more to light,” he believes. 

 

There is “an awful lot of opacity” in reporting diversity and how it influences investment outcomes, he says, comparing the situation to that the investment community is facing with measuring and reporting on sustainability.  

 

If government was to set the tone on the reporting standard – as it is doing on sustainable investing by requiring pension funds to report in line with the Task Force on Climate-related Financial Disclosures – that would be “helpful”, finds Redmond. 

 

 

Redmond says WTW has been looking at diversity and inclusion in its manager ratings “for a while” but is only now ready to publish a paper on this, due out shortly. Although the data is less robust than for company boards, he supports a view that more diverse investment teams take better decisions, ultimately leading to better risk-adjusted returns. 

 

“The hard reality is, and we spent lot of time on this, that more diverse investment teams tend to produce better outcomes,” he says. As such, any consultant doing manager research should look at diversity, and Redmond says that consultants “have a very important role” in this, but “you need the asset owners to play their part, too”, he adds. 

 

A lack of diversity in an asset manager might not be enough to keep them off a buy list, he says, but to stay on it, the manager would need to demonstrate a plan for how they will rectify the problem.  

 

“I think this is hardest for relatively small boutiques where it’s two portfolio managers and five analysts and they’ve always done things a certain way, they have exceptional stability, they [are too small to] invest in a diversity officer,” he says. “But if they just did engage, all it would take is a couple of hires and they’d move quickly up the curve." 

 

 WTW has dropped asset managers for lack of diversity and lack of engagement on the issue, he notes.  

 

Redmond is however sceptical of investors committing to investing with women and minority-owned managers, arguing that this has not been "particularly effective” in the US partly because it is voluntary, and argues that it does little to change the wider industry; yet he says the industry should not go down “the path of being too specific about quotas and rules”, saying that each firm’s starting position should be taken into account. 

 

 

The Stewardship Code 2020 by the Financial Reporting Council is strengthening corporate governance including in relation to diversity, requiring signatories – such as asset managers – to ensure stewardship activities are appropriately resourced, including in relation to diversity. 

 

The FCA also published a discussion paper on ‘Transforming culture in financial services’ in March this year, with the overarching aim to reduce harm to consumers and markets, but noted that “we aren’t going to prescribe a one-size-fits-all culture for the industry”, which points to a reluctance to propose rules for regulated firms when it comes to diversity. 

 

The FCA has however created a working group to come up with a strategy to further its work in embedding diversity and inclusion in financial services. Similarly, the Pensions Regulator leads an industry working group on diversity, recognising the problem within asset owners like pension funds, although it too was quick to rule out quotas. TPR said in February that it aims to create “clear definitions of what is meant by diversity and inclusion in a pensions context and deliver good and best practice guidance” for trustees. The working groups are still due to report back. 

 

 
 

Marisa Hall

Caroline Escott

Norbert Fullerton