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How Investors Can Boost Their DE&I Efforts

Diversity is one of the most familiar words in the investing world. No matter where investors are located, who they invest for or why, they know that diversifying their holdings helps them minimize risks and optimize their portfolios for the long term.

The inherent logic of portfolio diversification also makes it easy for investors to see the wisdom of owning companies with diverse boards and talent pools — or hiring money managers from different racial and ethnic backgrounds. But how do you effectively implement such strategies once you’ve realized their benefits?

If you’re an investor struggling with that question, don’t worry — you’re not alone. As the events of the past year have shown us, corporate America as a whole has woken up to the fact that businesses need to do more to increase diversity and racial equity.

As the leader of Robert F. Kennedy Human Rights’ Compass Investors program, I’ve had the chance to convene a series of conversations on the topic of diversity and racial equity with our network of more than 300 asset owners, asset managers and consultants who collectively control close to $7 trillion in assets under management. We’ve realized that the answer isn’t as daunting as it seems. We’ve distilled it into a simple action plan that investors can implement, regardless of whether they’ve already started down the path of increasing diversity and racial equity or are just getting started. Here’s how you can help do your part.

Build a workplace that is racially inclusive at all levels

The most logical place to start is one where you have the most control: your own workplace. Before institutional investors scrutinize fund managers and company boards to help them boost their diversity efforts, they first need to take a look within their own walls to see where they can make improvements. Begin by examining the makeup of your investment teams, committees and boards of trustees.

Then, move down the ranks and see if your organization has pockets of diversity within certain areas like back-office and secretarial work. If all of your most diverse employees are relegated to supporting roles, it’s time to question whether your organization has the processes in place to provide advancement opportunities for people of color at all levels. You can fix that by identifying and creating practical pathways to advancement within your organization, such as mentorship opportunities that encourage underrepresented candidates and staff to network and try out new roles.

One way to expand and build these pipelines is to stop placing excessive value and confidence in candidates from elite universities and to start actively recruiting elsewhere. Insisting that all candidates have traditional backgrounds and flawless resumes just creates a culture of closed-mindedness that inhibits innovation, and creates blind spots to once-in-a-generation talents like Oprah Winfrey, who was one credit short of graduating from Tennessee State University in 1975 (she eventually got her degree in 1987).

Take a systemic approach to sharing the wealth

The next biggest thing your organization can control is who it does business with. The good news is that every contract is an opportunity to promote racial equity. The bad news is that, far too often, companies owned by underrepresented minorities only get looked at for lower-level contracts like food services and custodial work as opposed to legal and consulting services or external money management roles. Don’t make that mistake; spread the wealth by creating processes to ensure diversity is a factor in all your organization’s contracting needs, not just the ones that are easiest to fill, or are out of public view.

One of the most impactful processes asset owners can set up to increase the number of diverse managers they work with is a program for identifying and hiring investment management firms run by minority- and women-owned firms. These programs can help institutional investors promote more diversity within their manager lineups and, in the process of doing so, diversify their portfolios as well. The $248 billion New York State Common Retirement Fund, Albany, has committed $7 billion to an emerging manager program, which has given the pension system access to new and diverse managers across public equities, private equity, fixed income and other asset classes. More than 20 emerging and diverse managers have graduated from the program, which shows the retirement fund has made the initiative a priority.

Organizations without programs that actively source for diverse managers can look to New York for an example of how to create such a program with existing pools of capital. Those with programs already in place should update their strategy to prioritize underrepresented minority fund managers, especially those fundraising for the first or second time, so that newer firms can also get a look.

Lead by example

Once you have processes in place to promote diversity and racial equity through your actions, you are ready to lead by example. Start by making it clear to your investment managers — whether they’re minority-owned firms or not—that diversity is something you care about and want to see represented in the regular information updates they give you. Don’t underestimate the power of a simple question, such as, “Do you track and report the racial composition of the boards of directors of your portfolio companies?” Asking the question will send the message that you care about this data point and encourage your investment partners to care about it as well, which can lead to a deeper conversation about encouraging more diversity in leadership ranks, hiring processes and all the other initiatives that you’ve implemented — or are implementing — in your organization.

There is no substitute for leading by example, whether you have several billion dollars to allocate to diverse managers or only a small contracting pool to fill. The best way investors can build a more equitable and just society is by using their financial capital and leadership influence to create change long term.

If that sounds familiar, it should — it’s how portfolios grow over time, aided by diversification.

Read the original article here.