This recap of Tideline’s Compass Series event on “Putting Diversity Promises Into Action” was written by Carol Lee and Jane Bieneman. Watch the full recording here.
Despite decades of efforts to increase diversity and representation across the financial services industry and corporate America, little has changed. To cite a few statistics – only 2% of VC capital goes to women, diverse-owned firms represent just 1.4% of U.S.-based AUM (despite comparable performance to white, male-owned peers), and diversity at the senior ranks of management remains minuscule. While we are encouraged to see strong focus today on diversity, equity, and inclusion (DEI), we are wondering if this time is different. Will real change result from the work happening in impact investing, as well as the many initiatives being launched broadly across the market?
We asked experts from the Ford Foundation, Hamilton Lane, Institutional Limited Partners Association (ILPA), and Prudential during our recent Compass Series, “Putting Diversity Promises into Action”, about why this time is different. Are we looking at new approaches to DEI – a version “2.0”, of sorts – that will actually turn promises into action? We heard some reasons to be optimistic.
New standards and frameworks
The emergence of new market standards and frameworks is providing investors with the tools and guidance they need to intensify rigor and accountability. For example, in December 2020, ILPA launched Diversity in Action (DIA), a framework identifying definitive actions to help GPs, LPs, and consultants advance diversity and inclusion within their organizations and the industry.
About the DIA initiative and its focus on results, Jen Choi, Managing Director of ILPA said, “It’s not a pledge….[it’s for] those organizations that are not just committed but are taking specific actions. And we validate.” As of writing, the DIA has 228 GP, LP, and consultant signatories of varying sizes.
To date, DEI factors have generally been considered only during due diligence and with a modest degree of scrutiny. According to Katie Moore, Managing Director and Head of Emerging & Diverse Investments at Hamilton Lane, a survey of GPs conducted last year found that “fewer than 10% of LPs ask for diversity metrics [from GPs], and only at the time of diligence.” Moore sees this changing because of tools like the DIA that create standardized diversity metrics and questionnaires and support the growing LP expectations – and requirements – that GPs monitor and report on DEI across the investment lifecycle.
Roy Swan, Head of Mission Investments at the Ford Foundation, added that he is “feeling very good about the emerging ecosystem” of intermediary organizations, and their underlying systems and tools, such as Value Reporting Foundation, Novata, Corporate Call to Action, and BlueMark.
In addition to challenges in standardizing practices, it has been difficult to know what is considered “good” in DEI today. “I talk to GPs all the time who ask, ‘How do I stack up to my peers?’” said Choi.
Fortunately, groups such as Lenox Park have made progress in creating guidelines that help investors understand how to measure diversity and benchmark their progress against baselines and the market. Lenox Park’s Diversity Impact Score is like “a FICO score for diversity and inclusion,” said Cherrise Cederqvist, Head of Prudential’s Emerging Manager Investment Program, who uses the tool to gauge levels of diversity in asset managers.
Building these foundations allows the industry “to start setting goals and objectives”, said Choi. “Not as a ceiling, but as a floor against which we can measure our progress over time,” increasing transparency and confidence in determining and achieving DEI targets.
And, as it relates to the “business case”, both Moore and Swan noted that diverse managers perform well. Swan cited research from HBS’ Josh Lerner showing outperformance and Moore pointed to Hamilton Lane analysis that top quartile emerging managers have done “exceptionally well.”
Historically, demand for stronger DEI practices and performance has come largely from external constituents such as clients and regulators. However, according to Cederqvist, “this time…there is internal interest as well. People want to work for a purpose-driven organization.”
Similarly, Choi noted that the DIA signatories are considering questions such as, “How do you tie the end-of-year assessment process to an individual’s contribution to culture, to values, to specific DEI objectives that are relevant to their mandate within their organization?” Both external and internal demands may compel investors, and underlying companies, to treat DEI as an important business consideration.
Past definitions of diversity – for instance, at least 50% diverse ownership of the GP – could exclude funds where women and minorities were in de facto positions of authority. Today, investors are using “a wider aperture [that] can include less stringent requirements on the definition of diversity,” said Swan. Illustrating what can be accomplished with a rigorous but “open door” approach, Ford’s $1 billion market-rate Mission Related Investment program has allocated 63% of total commitments (based on dollars) to diverse managers since its launch in 2017.
“We realized that if you want a bigger universe of investment possibilities, you’ve got to really expand that definition,” said Cederqvist. “We [at Prudential] view it as substantial ownership: 25% or more, roughly. And decision making: if there is a woman or minority at the helm who is really critical to the investment process, we will definitely consider that.”
Hamilton Lane similarly has a somewhat flexible understanding of diversity – a diverse manager meets two of the four following tests: greater than 25% diversity by ownership, carry, investment committee, or investment team.
While there is no panacea to DEI challenges, we see real change happening through the emergence of new organizations, standards, data, and practices. This development, combined with a fundamental change in the demands from internal stakeholders and – critically – underlying investors to whom asset managers ultimately answer, is driving change that we expect to be long-lasting and compounding. This time, we do see movement from promises to action and a pathway to a different outcome.