This article—the fourth in a series on diversity, equity, and inclusion in investing—examines how investment committees and boards of leading institutional investors are overseeing incorporating diversity, equity, and inclusion into investment teams and investment portfolios. What can we learn from institutional allocator best practices on embedding diversity equity & inclusion (DEI) in legal and governance documents, signing DEI pledges and codes, and harnessing investment consultants toward DEI?

This series of articles is a product of multi-stakeholder discussion among the leadership of numerous nonprofits focused on diversity, equity, and inclusion in investing facilitated by Institutional Allocators for Diversity, Equity, & Inclusion (IADEI). It also includes results from a survey of 18 leading asset owners.

1. DEI in Legal and Governance Documents. 28% of asset owners have DEI in their investment policy statements, 12% insert DEI clauses into side letters, and 6% into LPAs. DEI language in investment policy statements tends to be general. For example, diversity of ownership and leadership, whether the firm has a compelling DEI initiative and has made progress in DEI, and the degree to which the firm’s business activities benefit marginalized communities may all be noted as investment considerations in investment policy statements.

DEI clauses in side letters and LPAs are focused on requiring managers to respond to DEI surveys and on the presence of talent and retention policies, which tend to be associated with greater diversity.

Other asset owners include diversity as an investment belief or develop diversity statements. For example, diversity is incorporated into one of the California Public Employees’ Retirement System (CalPERS)’s ten investment beliefs, according to CalPERS Chief Diversity, Equity, & Inclusion Officer Marlene Timberlake D’Adamo: diversity of talent (including a broad range of education, experience, perspectives, and skills) at all levels (board, staff, external managers, corporate boards) is important; and CalPERS may engage investee companies and external managers on their governance and sustainability issues including diversity.

2. Signing DEI Pledges and Codes. There is some skepticism about DEI pledges and codes, in part because board and investment committee terms tend to be shorter than the time required to achieve a diverse portfolio.

Nevertheless, 44% of asset owners had signed DEI pledges, most commonly ILPA’s diversity in action initiative, which requires signatories to (i) have a public DEI strategy or statement and/or a DEI policy communicated to employees and investment partners that addresses recruitment and retention, (ii) track internal hiring and promotion statistics by gender and race/ethnicity, (iii) set organizational goals for more inclusive recruiting and retention, and (iv) request that LPs and GPs provide DEI demographic data for any new commitments or fundraises. There is also a list of nine optional activities that participating organizations can choose to adopt.

Other asset owners had signed the CFA
CFA
Institute’s new Diversity, Equity & Inclusion Code, which commits signatories to (i) promoting DEI and improving DEI outcomes and (ii) increasing measurable DEI results in the investment industry; (iii) measuring and reporting on progress in driving better DEI results to senior management, the board, and CFA Institute; (iv) expanding the diverse talent pipeline; (v) designing and implementing inclusive and equitable hiring, on-boarding practices, (vi) promotion; and retention practices.

A number of UK-based asset owners signed the Asset Owner Diversity Charter, which commits signatories to include diversity questions in manager selection and ongoing monitoring and to identify diversity and inclusion best practice.

A number of asset owners, including United Church Funds, signed the Investor Statement of Solidarity to Address Systemic Racism and Call to Action in 2020 to have some tangible aspirational goals, explains United Church Funds Director of Responsible Investing Matthew Illian. Signatories committed to actively engaging with, amplifying, and including Black voices in investor spaces and company engagements; embedding a racial equity and justice lens into their own organizations; integrating racial justice into investment decision-making and engagement strategies; reinvesting in communities; and using investor voices to advance anti-racist public policy. Other endowments and foundations signed Confluence Philanthropy’s Belonging Pledge, which commits signatories to discussing racial equity in their next investment committee meeting and sharing next steps and results to identify industry-wide barriers and the technical resources required to advance the practice of investing with a racial equity lens. Confluence Philanthropy CEO Dana Lanza notes “we were happy to see a modest uptick in racial equity commitments in IPS’s amongst Belonging Pledge signatories.”

Some asset owners also ask the venture capital managers in their portfolio to sign the Diversity Rider, which codifies founder and venture capitalist efforts to ensure a diverse capitalization table and can have an outsized impact over time if diversity is built into the culture and team and the early stages of company development.

3. Harnessing Investment Consultants Toward DEI. Some asset owners set minimum diversity thresholds in consultant contracts for manager searches. Although progress is slow, widening funnels at consultants is already contributing to more diverse investment portfolios. Cambridge Associates in particular committed in 2020 to double the number of diverse-owned managers and percentage of AUM invested in those managers by 2025, according to Cambridge Associates Director of Strategy for Diverse Manager Research Carolina Gomez. Asset owners in turn can propel increasing diversity in consultant funnels by setting diversity goals.

The Long Walk to a Diverse and Inclusive Investment Value Chain

Achieving a diverse, equal, and inclusive investment value chain will be a long road. Collaborations like the idea exchanges among IADEI and its like-minded cousins listed below and the collaboration within the endowment and foundations community to produce the largest open-sourced list of diverse-owned and diverse-led investment managers that IADEI maintains demonstrate what committed peers can achieve together.

In particular, next month IADEI and its cousins will explore and share best practices and lessons learned on selecting for and promoting DEI in investment portfolios. Stay tuned!

Acknowledgements: Institutional Allocators for Diversity Equity & Inclusion (IADEI) would like to thank leaders from CFA Institute, Diverse Asset Managers Initiative (DAMI), IDIF, Institutional Limited Partners Association (ILPA), Intentional Endowments Network (IEN), Milken Institute, One Women Initiative (OWI), Confluence Philanthropy, Standards Board for Alternative Investments (SBAI), National Association of Investment Companies (NAIC), Chartered Alternative Investment Analyst Association (CAIA), Value Reporting Foundation (VRF), and FCLTGlobal for their work to increase diversity, equity, and inclusion in the investment value chain and for generously sharing their insights and expertise.