Prove it.
That seems to be a mantra among those who struggle a bit with the seismic shift we are seeing today in the role of Environmental Social and Governance factors (ESG) in asset management.
For issues such as climate change or global warming which may not be observable, up close and personal, in our day to day experience, I can maybe see how a debate could form. But there are other aspects of ESG which quite simply stare us in the face.
Diversity is one of these. Greater diversity in organizations, and in decision making, is seen as a mark of good governance and is promoted and sought after by lobby groups, regulators and governments alike.
Not only is it the right thing to do but it leads to better overall outcomes both in terms of risk or reward.
And does it?
There has been huge research in this subject with gender diversity being especially studied. While there is a wide body of evidence, McKinsey and Mercer have been among those to the fore.
The conclusions I’ve seen on greater diversity, are all unambiguously positive and powerful.
Just to give a flavour:
Peterson Institute: increasing female participation at corporate leadership level up to 30% associated with 15% boost to profitability.
Gallup: Gender diversity strengthens company financial performance through greater engagement levels.
McKinsey: Companies with the greatest gender diversity shown to have 15% superior financial returns.
Harvard Business Review: Positive correlation between diversity and financial performance both in terms of risk and reward.
There is a growing body of research that draws similar conclusions – that diversity (gender and other wise) is a positive contributor to outcomes.
We have seen enough evidence, especially within the asset management industry, where features like dominant individuals, unchallenged practises, groupthink, etc.(all the opposite of diversity!) have led to disasterous outcomes for clients.
So while diversity may seem like one of the softer factors within the ESG family, it has been shown to have quite powerful outcomes and certainly worthy of inclusion in the investment process.
But it’s a two way street.
For some, the fact that the asset management industry, now with its new found drive and passion to manage funds on an ESG basis, is highlighting and championing issues like diversity is sadly ironic. Asset management companies themselves also need to be held to account for their own performance on diversity metrics. Mark Carney has described the levels of gender diversity in UK financial services as “shocking”.
This suggest that there needs to be a conversation between the likes of pension trustees and their investment managers, to view the ESG debate in the round and ensure that both are making meaningful progress.
Tradewinds 