This news service speaks to a number of firms in the wealth management field about what is being done to achieve racial equity in ways that can be copied and put into practice on the ground.

Battling COVID-19’s economic effects has pushed environmental, social and governance issues down the agenda for large investors. By definition that also means inclusion and diversity issues, a recent survey has shown.

The study by US consultancy Endelman of around 600 senior investment managers found that more than 80 per cent of firms have been reducing their ESG investment priorities since the pandemic.

It is one of the few surveys that has gone against a tidal wave of “sustainability” activity over the last few months, seen in record numbers of new ESG funds, ESG data tools, academic/industry partnerships and the like flooding in.

There is no doubt that the pandemic has awakened investors to grim social realities that have pushed social inequality up the list of shareholder concerns. This was seen in a record number of ESG-related resolutions being passed at this year’s annual voting season.

Boston-based Cambridge Associates recently published a white paper on racial equity aimed at getting to the heart of the structural racism and biases holding back financial services. To gauge progress, we spoke to the firm and others about what they are doing to improve racial equity in the industry that other firms can follow, beyond publishing research and signing pledges.

Liqian Ma, head of sustainable and impact investing research at Cambridge, told this service that events sparked by the murder of George Floyd in Minneapolis in May and the killing of Jacob Blake in Wisconsin in August had a “catalyzing effect” that awakened investment committees and boards to how deeply rooted these issues are.

But translating that awareness into action is much harder and not simply about carving out a new investment allocation.

“The knee-jerk response often times from investors is: ‘We have to do something now; let’s create a program; let’s put out a press release. Let’s write a check to a diverse manager.’ Of course, it is all well-intentioned but risks being a temporary solution,” Ma said.

The firm’s message to clients and the broader market is "you need to act now but do it in a thoughtful way."

One of those ways, and carrying a compelling business case, is a firm improving the diversity of their fund managers. A well-thumbed study released by Harvard Business School last year found that the top performing hedge funds, mutual funds, and private equity owed much of their fiduciary success to the performance of firms that have diverse ownership. Institutional investors are also doing more now on training for unconscious bias and hiring specialist consultants to help rebalance their teams.

For the family office and institutional clients of Cambridge Associates, a good place to start prioritizing is looking at their governing policy. “What does your investment policy statement say? And how can you use it to make racial equity or social equity a central part of your investment priority?” Ma said.

Second is allocating to diverse managers to help close the capital gap. The firm’s 2020 report Racial Equity Investing: The Time Is Now is stark reading on how unequal access to capital has been for diverse managers and entrepreneurs.

Third is engaging with all investment managers, asking them how they are addressing diversity and equity inclusion in their recruiting, decision-making, and who they are funding from a portfolio company perspective.”

Signs
While much has been riding on the pandemic acting as a giant reset to sweep us all into a better, fairer future, there are encouraging signs that mindsets are changing.

A recent broad study from BNP Paribas on how the pandemic is shifting the focus of the three “ESG” investment pillars, found that 70 per cent of respondents now expected “social” considerations to become “extremely" or “very important” from now on. Interest in making a social impact has shot up by 20 per cent among investors since the crisis hit, and is closing the gap on environmental and governance concerns, the French private bank reported.

While ESG scores have become a critical measure for evaluating companies, the S has tended to take a back seat, the firm’s head of sustainability Jane Ambachtshee said, often because “social indicators can seem less tangible or harder to measure.”

But looking at companies through a more critical social lens is now more prevalent. BNP Paribas is among many big wealth firms putting "significant focus” on a range of ‘S’ indicators, including gender and race that support more inclusive growth.

The tough part is nailing down where actual progress is being made.

Despite mounting research on the benefits of bringing in different perspectives, whether it’s in the boardroom or around the investment table, it still goes against the grain of how deals are being struck, especially in private markets such as venture capital or private equity.

The venture capital community in particular has a dismal record for channeling capital towards women or minority-owned businesses, this publication has been told in the past.

How then does a firm like Cambridge Associates address these market realities?

Ma admits that private markets have historically mostly operated in ‘closed networks'. "Investors have all gone to the same school, or worked in similar sectors, where they are comfortable referring deals to one another,” he counters, but they are missing out.

“Diverse managers often come with different networks. If you are a venture investor and looking for differentiated deal flow, or ones that are less competitive or the market has overlooked, it is better to have a diverse manager leveraging those networks and finding those deals, even if they are highly competitive.”

Supporting minority entrepreneurs or having access to a pool of diverse managers is often what gives you the edge, he said. “They understand what the founder is trying to achieve in terms of impacting their community.”

Aside from the industry making a moral or ethical case for adding diversity, recognizing the types of insights diverse managers can bring is not being talked about, he says.

Instead of funding “authentic change around groups that have formed more naturally,” investment firms end up “manufacturing” offerings in response to an opportunity, Ma said.

He vouches that Cambridge searches out examples of teams and managers that have been developing organically over time or spun out as diverse teams from established firms; he says the firm looks to the larger traditional players and their funds for talent but is open to searching the whole universe for established as well as emerging teams.

If that all sounds rather wooly, the firm has compiled a database of 500 plus managers identified as being diverse, who in turn represent more than 100 balancing-up strategies.

“We have publically committed to double the number of diverse managers on our platform and the client dollars invested in those managers in the next five years,” he added of the firm's commitment earlier this year.

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A real investment case to be made
Since publishing the diversity paper, Ma says he’s on the phone two or three times a week with CIOs of large endowments, family offices and wealth owners who are trying to figure all of this out.

In October, the philanthropy sector added its weight to the issue when organizations representing $1.8 trillion in AuM signed up to California-based Confluence Philanthropy's initiative to improve racial equity as part of its “Belonging Pledge.”

Participating firms have publically pledged to forge new ways of investing in diverse managers, bringing more diversity into investment committees, and widening the choice of racial-equity themed investments.

A look at the 150 or so organizations that have committed, roughly half have said they already include language about racial equity in their investment policy statement, while a quarter said they are interested in or intend to add racial equity language to their investment policy. Around 60 per cent said they have already made explicit, racial equity-themed investments, with 18 per cent noting an interest or intention to do so in the future.

These carefully scripted industry initiatives often send mixed messages that Rome wasn’t built in a day at the same time that Rome is burning, leaving readers with the expectation of a long wait before the fire trucks arrive.

On a similar mission, Racial Justice Investing has gathered another cohort of investors and asset owners that are taking action on racial justice in their own organizations and raising the issue with their portfolio companies.

Black-owned investment firm Robasciotti & Philipson operating in San Francisco is another grassroots group pointing investors to useful screening tools to improve social justice-driven investment outcomes. In 2018, the firm launched Adasina Social Capital, which was formerly RISE (Return on Investment & Social Equity), as an investing approach to bring the sector more in line with social justice movements.

The California group is developing a social justice index to screen public equities globally for their support of social justice. Once launched, investors will be able to work with their own advisor to apply the index and there is no minimum investment required.

Others tackling racial inequity and biases in the sector are using technology to level the playing field. Veteran Citigroup executive Marcia Tal founded PositivityTech last year to identify biases in financial services, primarily based on parsing customer complaints.

“One reason it was important for me to start the company is I wanted to raise the power of consumer voices,” she said. It was something she felt she couldn’t fully achieve at Citigroup or inside another large institution because the retail focus is more transaction based.

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In August the firm launched a proprietary “bias index” tool that identifies prejudice within customer and employee complaints that should make it easier for companies to extract insight and respond to structural discrimination.

“In banking, bias reveals itself in subtle ways,” Tal said. “Customers may experience an obstacle and find that discrimination is at the root of their challenge.” This may be due to their race, age, religion, gender, sexual orientation, military service, or citizenship, she said.

It isn’t typically the volume of complaints that triggers action, Tal told this service on a recent call, but more analyzing complaints patterns across an organization and a firm’s competitors to find early warnings of where company behavior or systems are letting people down.

“The technology learns from the actual words of the customers so the AI behind it is about as ethical as it can be,” she said.

The Georgia-based Selig Center for Economic Growth has estimated that the combined buying power of blacks, Asians, and Native Americans in 2016 was $2.2 trillion, up by 138 per cent since 2000. The same research showed that the buying power of Hispanics was up by 181 per cent to $1.4 trillion; while the buying power of white consumers increased by only 79 per cent in the same period.

These sorts of growth statistics are regularly trotted out to encourage wealth firms to speed up their efforts to represent and reflect this diverse society better.

But even at wealth managers with a very active management approach, reasons why progress on racial equity is a slow flood back. The most common refrain is a lack of pipeline, where the funnel is still reliant on traditional investment banks, management consultancy firms, and others of similar ilk.

It creates a compounding effect, says Cambridge Associate’s Ma. Because investors and entrepreneurs of color have been held back for so long by capital and opportunity, they aren’t in a position to allocate capital or take P&L risk at a firm. “They don’t have a deep track record for allocators like us. But that is changing,” he said, mainly because of resources that Wall Street is pouring in to expand the recruiting pool.

Educated at Harvard, Ma began his own career as a financial analyst at Goldman Sachs so he is well aware of the traditional feeder routes into private and investment banking.

Prior to the Black Lives Matter protests, he says the firm was getting plenty of push back on diversity from managers, asking, ‘why are you asking about this? We don’t disclose diversity data,’ “but now they really need a good reason,” he said. “The goal isn’t to say, ‘We gottcha,’" Ma says, of holding fund managers to greater account.

Changing US demographics is another reason why wealth managers will want to hasten attracting and developing more diverse advisory talent. By 2065, it is estimated that a majority of the US population will be from a minority, and the US labor market is expected to shift that way much earlier by 2030.

Bank of America announced $1 billion earlier this year to address racial inequality, and others, including Royal Bank of Canada, are commiting resources to increase non-white hires and open up more business loan opportunities.

“There is a real opportunity to build long-term relationships with these rapidly growing communities,” Ma said. “These are segments of the population where you need the cultural competence to build long-term relationships. Having a diverse management team and board that really understand their needs and develop a market strategy is good business sense.”