Institutional investors increase focus on ethnic and gender diversity in wake of 2020

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More than half of US institutional investors report that the events of 2020, including the protests over George Floyd’s death at police hands, have influenced their thinking on diversity and inclusion in their investments.

A survey of 100 institutional investors by Aon found that 58 per cent have become more attuned to issues of gender and ethnic diversity in their investment approach and thinking. 

Investors may also be responding to a shifting climate in the industry, with stakeholders and shareholder activist groups upping their focus on diversity.

Aon’s survey found that 11 per cent of investors say they have felt greater pressure from stakeholders to take concrete action by investing with diverse managers in the last year. 

Another 18 per cent reported that constituents, boards and beneficiaries are now asking for statistics on diversity within their portfolio, while 13 per cent of investors felt more pressure to engage with diverse investment firms.

Women and minorities managed less than 2 per cent of global assets under management at the end of 2018, or USD1.3 trillion out of a total USD69 trillion, according to a study from the Knight Foundation. 

“Institutional investors, such as pension and endowment funds, have an obligation to invest their money wisely. This can – and should – include working with women- and minority-owned and managed firms. There is no reason not to do so,” said Juan Martinez, Knight Foundation chief financial officer, when the study was published in 2019.

While some institutions have begun taking steps to bring diversity into their investment portfolio, Aon’s survey found an overwhelming 87 per cent have no targeted allocation to diverse managers. Almost one third, 31 per cent, said they have no policy or programme for this, and do not intend to launch one in future. 

In May 2020, widespread protests at the killing of George Floyd were accompanied by a flood of statements from corporations and financial institutions condemning racism and committing to make internal improvements to their organisations. 

BlackRock’s chief executive Larry Fink wrote a post on LinkedIn in which he emphasised the need to “consider where racial disparity exists in our own organisations and not tolerate our shortcomings”, and later in the year outlined plans to push portfolio companies to improve gender and ethnic diversity at board level.

Nevertheless, BlackRock has come under renewed pressure in recent weeks to live up to these promises. This week, the asset manager was reported to have opened an internal review surrounding former employees' allegations of racial discrimination and sexual harassment.

According to Aon’s survey, 7 per cent of institutions have launched a formal diverse investment manager policy in response to the events of 2020. Almost one third of institutions say they allocate to diverse managers because they believe that cognitive and behavioural diversity will lead to excess returns.

Research published by the Harvard Business Review has found that improving cognitive and demographic diversity on a company board, across sectors, is likely to enhance performance.

Previous research from Aon and the National Association of Investment Companies (NAIC) found that diverse private equity firms outperformed median performers in most years.

According to Aon’s latest survey, more than half of investors say additional research is needed on the return profiles of women-managed and minority-managed funds before they take action.