Pension Funds Slow on DEI
Asset owners are urged to better reflect their priorities when engaging with third-party providers and underlying investments.
Diversity, equity and inclusion (DEI) themes have been increasingly featured in pension funds’ investment policies and assessment criteria for third-party providers, but research has highlighted their surprising absence in ongoing engagement efforts.
Published by pension fund advisor Pensions for Purpose, the report drew on interviews with 21 organisations – including pension funds, trustees, asset managers and investment consultants – across the UK, Europe and the US, outlining how they consider DEI across their organisation and underlying investments, as well as their approach when interacting with third-party providers.
All surveyed asset owners agreed that DEI correlates directly with business performance and have integrated such themes into their business models to varying degrees. Forty-two percent of asset owners have also implemented DEI voting and engagement polices, expecting diverse board representation.
However, the level of development of pension funds’ DEI action plans and strategies still “varies significantly”, Pensions for Purpose said. For example, almost a third have not set specific targets, and only two were intentionally considering DEI topics in their underlying investments. There also remains a “marked lack” of engagement on DEI in pension funds’ underlying portfolio companies, the report noted.
“There are pension funds doing great things on DEI, and they think about it holistically,” Karen Shackleton, Chair and Founder of Pensions for Purpose, told ESG Investor. “But those pension funds remain in the minority.”
Ninety-two percent of surveyed pension funds said they had incorporated DEI factors into asset manager selection and oversight processes, with one asset owner commended for setting explicit representation targets for prospective asset managers and mandating a minimum participation of 50% of women or individuals from underrepresented backgrounds on the investment committees of their outsourced CIO.
“However, most of these asset owners aren’t then challenging their managers [or investment consultants] to improve their DEI performance,” said Shackleton. “It’s fairly straightforward for an asset owner to bring DEI into their selection process, but beyond this DEI appears to be a consideration, not a deal breaker.”
Until asset owners start regularly encouraging third-party providers to improve their DEI performance beyond the selection process, they won’t improve, Shackleton argued.
“It’s so important for asset owners to ask them to provide related information on their underlying investments and engagements and the impact this has as a result,” she added. “If that happens, businesses will be better run and returns will improve.”
Earlier this month, the Asset Owner Diversity Charter (AODC) launched its new advisory board to accelerate the charter’s work on promoting DEI among fund managers.
Pushing the boundaries
According to Pensions for Purpose, the assessed asset owners largely only began thinking about DEI during the past five years. The majority (46%) kicked off their DEI focus between 2020-22, while 15% did so between 2015-19, and 8% in the early 2010s.
Shackleton acknowledged she was quite surprised by this. “But they are definitely now on that journey, and it started with them looking at their own organisations,” she added.
In the last two years, in particular, pension funds significantly advanced their DEI strategies by integrating these principles into their operations and establishing specific action plans, scoring systems and criteria for voting.
“However, a number of asset owners mentioned the data challenges [around DEI], and this is why many of them are prioritising gender diversity and ethnicity over other themes, like neurodiversity,” Shackleton continued.
Due to increasing expectations from asset owner clients, asset managers are also increasingly tracking key DEI trends – such as gender diversity, gender and ethnic representation on boards, and age balance, the report noted. Consequently, data availability in those areas is often prioritised.
In contrast, other important but less quantifiable DEI themes such as neurodiversity and disability are not as comprehensively reported on – meaning asset owners find it more difficult to procure relevant data. A report published by investment consultancy WTW showed that just 42% of assessed asset managers had measurable objectives in their DEI policies.
Another assessment of the UK’s investment management industry conducted by the Investment Association found that 96% of firms collected data on two or more DEI attributes, while and 71% collected data on four or more factors – such as age, gender and ethnicity. In addition, 33% of firms indicated plans to collect data on socio-economic background, caring responsibilities and neurodiversity.
“We get too hung up on data, and have an overreliance on it,” said Shackleton. “But from a qualitative and common-sense perspective, it’s clear that good governance comes from diverse boards and diverse decision-making.”
Instilling this perspective will largely come from educating pension trustees on DEI-related issues and the benefits of resolving them.
Pensions for Purpose outlined recommendations for best practice going forward, including initiating mandatory internal DEI training to establish a common understanding, and setting clear standards for diversity across investment committees.
To that end, the advisory firm plans to provide training on DEI for pension funds that can be implemented into organisations and applied to future assessments and engagements with third-party providers.
“When we interviewed these pension funds, one of the questions we asked was: do you believe that DEI will lead to better performance and better returns?” said Shackleton. “Pretty much everyone we spoke to said yes. If we can address this systemic issue, we will all be living in a much better world.”
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