Inclusion and Diversity in Institutional Investment

Investing in Inclusion and Diversity

Inclusion and Diversity (I&D) is an essential consideration in any investment decision. We, like many clients and end-savers, want to see greater inclusion, equity and diversity in our own teams, in portfolios, and across the Investment industry.

Greater diversity typically begets diversity of thought (cognitive diversity) and wider perspectives. Crucially, greater diversity also makes teams more representative of the people on whose behalf they are taking decisions.

Leading research supports our belief that teams with more diversity typically make better decisions and produce better long-term outcomes. Our recent paper, "Diversity in the asset management industry: on the right track, but at the wrong pace”, also found that diverse investment teams generated higher excess returns than less-diverse peers.

Source: WTW Diversity in the asset management industry, 2019, McKinsey, Diversity Wins 2019, McKinsey, Diversity Matters 2015

WTW is continuously evolving its approach to I&D to enable our clients to better understand its impact on portfolios, using I&D frameworks and comprehensive reporting tools. We are also reflecting internally and regularly engaging with asset managers and investors on the topic. WTW is pushing for more data transparency and robust policies, both directly and via industry initiatives.

We believe diversity cannot be measured by any single metric and prefer to build a richer picture of diversity across multiple traits and intersections, and across all levels of the firm. Comprehensive data and regular engagement enable us to build a forward-looking view of inclusion, equity and diversity across firms and portfolios more broadly.

Inclusion and Diversity has historically sat under the umbrella of Sustainability, and like climate change, often impacts the success or failure of other ESG initiatives. We believe I&D is a critical societal issue directly impacting our clients and end-savers. This is why we choose to separate out these distinct topics to ensure they are prioritised in our engagements with clients, managers and the wider industry.

Our core I&D beliefs

Challenges for investors and end-savers

The Investment industry has historically lacked diversity and progress to date has been slow; investors and end-savers are demanding change. Over just one year, the top 200 US DB Plans have increased their allocation to diverse-owned asset managers by 76%¹. Many investors are looking to integrate I&D into their decision-making and across all of their portfolio, but challenges remain:

• It’s hard to know where to start. There is no collective best practice and because I&D is a multidimensional issue, there is no cookie-cutter solution. An appropriate approach for one investor/sponsor may not be applicable or attractive to another, so we recommend every client starts with considering their own I&D beliefs and understanding their current position.
• The data available on diversity is limited today. As WTW and other industry participants push for more transparency and gather data, this is likely to increase materially and become more consistent in coming years.
• You have to engage with everyone, including the less diverse teams. Given the lack of diversity in the industry, meaningful implementation of an I&D strategy is difficult if you just chase teams that are already diverse. Alongside seeking diverse teams, we believe we need to engage with the whole industry, pushing some of the largest and longest standing asset managers to improve their I&D.
• It’s hard to define what good I&D looks like. WTW has researched I&D in-depth for a number of years and is able to share with clients our observations of best practice and markers of I&D success across geographies and asset classes.
• Diverse ownership is not a complete solution. Many investors are focussed on diverse-ownership of asset managers only. We believe this can represent part of the solution and WTW has a number of diverse-owned managers on our roster, in addition to proactive initiatives to source more diverse-owned strategies. While this approach goes same way to increasing social equity, it limits your diversity efforts to a very small fraction of the industry, and usually a small portion of your portfolio, reducing its overall impact. It also fails to fully capture holistic cognitive diversity across a firm’s investment processes and decision making so may not reap the full benefits of diversity.

How we can help – bespoke, practical solutions

1. 01

   I&D Framework and Journey Plan

   WTW can work with you to build out and implement a Framework that aligns with the I&D goals of your end-savers and Plan Sponsors. We are helping clients in the US, EMEA and Australia to start the I&D conversation with key stakeholders.

2. 02

   I&D reporting - WTW Diversity Dashboard

   WTW can produce comprehensive I&D reporting for client portfolios, measuring diversity across different levels of a firm. We have collected detailed qualitative and quantitative diversity data on 1500+ investment strategies, including our Preferred products.

   The WTW Diversity Dashboard allows you to:

   • Get a clear, succinct view of the diversity of your portfolio and monitor progress annually
   • Identify data transparency gaps and engagement targets in your portfolio
   • Form the basis for an I&D action plan, with measurable long-term targets, if needed

   Our Sustainability report also provides transparency on the diversity of your underlying investments, focussing on issues such as Board diversity.

3. 03

   Investment Committee Diversity Assessment

   Clients are also able to assess the cognitive diversity in their own decision-making groups using our assessments for decision-making groups such as Trustees and Investment Committees. Using the tools, we will suggest potential changes to day-to-day processes to encourage and foster inclusivity within the group based on its unique make up.

Identify areas for improvement and engagement.

Diversity Journey Plan for Asset Owners

Monitor progress and re-evaluate as needed. Establish beliefs and I&D framework. Understand how your portfolio looks today. Identify areas for improvement and engagement.

Integrating I&D across WTW’s investment processes

We ensure I&D is properly considered across everything we do in Investments.

In-depth quantitative and qualitative I&D data collected on 1550 funds and strategies. WTW outreach to 65+ firms owned by diverse groups in 2022.

WTW's I&D efforts by the numbers

20+ bespoke client projects on I&D in 2020 and 2021. 650 products in our diverse pipeline. 200+ culture reviews conducted. In-depth quantitative and qualitative I&D data collected on 1550 funds and strategies. WTW outreach to 65+ firms owned by diverse groups in 2022.
Source: WTW, as at June 30, 2022

I&D is a key input into our Manager Research ratings process, leveraging our diversity data, in-depth Culture Reviews, and regular I&D engagements.

We have a targeted push to increase diversity via a three-pronged approach:

1. Sourcing of new diverse managers;
2. Ongoing engagement with our existing line-up about their own businesses and teams and;
3. Ongoing engagement with our existing managers around assessment and stewardship of the underlying portfolio investments.

We also have a number of tools to ensure our portfolio managers and our clients have a clear picture of diversity in their portfolios and can incorporate this into their decision-making.

Beyond this, we want to effect change across the industry through our involvement in industry initiatives and thought leadership in this important area.

Footnote

¹ Source: Pensions & Investments survey, February 2022