The Talent to Transform

Conflicting priorities have pushed DEI down asset owners’ priority list, but the AI revolution could bring workforce themes back into focus.

After a period under the spotlight and on the tip of everyone’s tongue, diversity, equity and inclusion (DEI) is short of attention from investors.

Why, you ask? Blame it on the climate.

As 2030 and 2050 net zero targets loom large, institutional investors, too, have had to shift their priorities. This means not just deciding which decisions and strategies to prioritise – but also dedicating the appropriate use of human resources.

And if it was always the case that the ‘E’ in ESG got more attention than its two sidekicks, this may now be truer than ever.

“On the diversity side, there is, unfortunately, not a lot of focus by pension fund trustees, insurance companies and wealth clients,” says Chris Redmond, Head of Manager Research at investment consultancy Willis Towers Watson (WTW). “That’s not a criticism per se, it’s just a necessary outworking of prioritisation – with climate, in particular, being an absolutely dominant area of focus because of all the regulatory and reporting burden.”

Many climate-related regulations have come into play globally in recent years, including those obliging corporates and financial institutions to comply with requirements under the Task Force on Climate-related Financial Disclosures (TCFD). Now preparations are taking place for compliance with successor disclosure standards from the International Sustainability Standards Board, as well as transition plans, either on a mandatory or voluntary basis.

And though the recommendations of the Taskforce on Nature-related Financial Disclosures (TNFD) aren’t fully in play yet – many organisations are starting to think about those too.

“These things take a lot of work and are a real drain on resources,” says Karen Shackleton, Chair and Founder of Pensions for Purpose, which advises UK pension schemes on their sustainable investment strategies. “Environmental issues have become a huge focus and take up any spare capacity. Organisations often have an ESG specialist who is responsible for all aspects of it, which is a lot of work. There’s only so many hours in a day.”

Corporations have had to invest significant time and budgets reporting on Scope 1, 2, and 3 carbon emissions, as well as in relaying that information to investors. This, explains Redmond, has been a factor in DEI dropping down the priority list.

We’re probably not quite as coordinated as we could be as a savings industry to push for better cognitive diversity and embracing people from various socio-economic, educational, gender, and ethnicity backgrounds,” he adds. “We’ve spent a lot of time trying to bring data to this issue, because it’s generally a softer area that’s difficult to analyse.”

There are increasing sources of data available to investors, such as the Workforce Disclosure Initiative, which collated corporate workforce data from almost 150 global businesses, including on DEI themes, to support investor engagement on workforce and human rights issues in its 2024 report. Mandatory disclosure requirements for businesses differ widely across countries, but Europe recently took a step forward with the four social standards included in the European Sustainability Reporting Standards which underpin the Corporate Sustainability Reporting Directive.

Engagement priorities

Further, investors are rarely mandated to report on social risks. In March 2024, UK pension funds were issued with guidance on how to factor social issues into investment decisions and stewardship by a taskforce established by the Department of Work and Pensions. But, unlike climate risks, they are not obliged to report on how they embed social risks into their policies.

These factors have had an impact on the extent of investor engagement on DEI and other social issues.

“It’s definitely a much lower priority: from an engagement perspective, climate has taken a lot of the spotlight,” says Emma Douglas, Sustainable Investment and Stewardship Specialist at Brightwell Pensions, and Co-chair at the Asset Owner Diversity Charter (AODC) – an investor initiative that counts 28 signatories with around £2 trillion in AUM.

“But where climate is now facing difficulties, the social side just hasn’t been thought about enough. The just transition was not integrated from the outset – hence the political backlash in the US, and all over the world,” she adds.

As these headwinds swirl, asset owners should remember the benefits of fostering DEI, Douglas insists – particularly across investment teams who need to be aware of different stakeholders and ideas. This can be achieved through better cognitive diversity.

“My big campaign is for sustainability to be thought of as a holistic topic: practitioners should realise that social issues – which DEI is a part of – and climate, will not be tackled if they don’t consider the communities who are affected by it,” she says. “With nature, lessons can be drawn from the climate transition. It’s not just about pressing for metrics and targets: we need that social licence to operate.”

The just transition involves support for workers and communities affected by the transition away from carbon-intensive industries, but also the equitable sharing of benefits from the carbon sequestration projects that generate carbon credits. Published at COP16, a set of principles for high-integrity biodiversity credits has been developed to ensure Indigenous Peoples and Local Communities are fairly compensated for their role in nature stewardship.

‘Stall speed’ effect

Peak time for companies setting DEI targets occurred around 2020-21 – a period marked by a combination of key drivers that brought such initiatives into sharper focus.

Those factors included the killing of George Floyd by a US police officer in 2020 and the ensuing Black Lives Matter movement; the Covid-19 pandemic, which further highlighted disparities in healthcare access, job security and economic outcomes, amplifying conversation about social justice and equity; as well as generally increased investor and consumer expectations around DEI, pushing for enhanced corporate accountability and transparency.

“We wrote a paper with a punchline along the lines of ‘DEI is on the right track, but at the wrong speed’,” says WTW’s Redmond. “If we were to publish that paper today, I would argue the speed has slowed even more.”

Redmond ventures a few explanations to this, including the sheer weight of responsibilities on investment teams.

“I do think there’s a certain level of fatigue – we’ve gotten to a place where [DEI] has fallen down people’s agenda,” he adds. “There is a question as to whether the world as whole has shifted to care a bit less about these things – though this is up for debate.”

Similarly to other aspects of ESG, DEI has also come under increased criticism in recent times, with its most prominent detractors coming from corporate America, with figureheads such as Tesla boss Elon Musk and hedge fund manager Bill Ackman.

But the race towards better diversity and inclusion isn’t a sprint to achieve arbitrary targets – it’s a marathon that can help firms benefit from drawing on and nurturing a wider talent pool.

“It’s an issue we need to address over decades, not over a short time period,” he argues. “This ‘stall speed’ phenomenon can be explained by the fact that, ultimately, it’s not about a one-off improvement in who you are attracting to apply – it’s about retention and the inability to attract a more diverse range of people at more mature stages of their careers.”

While ‘quick wins’ were easier to achieve when DEI had just become a hot topic – by devising a strategy, establishing a diversity committee, or hiring a chief diversity officer for example – the current stage of development may require businesses to display resilience and be more creative in their approaches.

“If you look at the diversity of people coming into the financial services industry, it’s not perfect – but it’s not bad in terms of reflecting society at gender and ethnicity level,” Redmond says. “However, more needs to be done to tackle lateral hiring, retain people from underrepresented groups within the workforce, and enhance diverse representation at more senior levels.”

A recent survey painted a mixed picture of progress toward greater ethnic and racial equality in the UK finance sector. Reboot’s fourth annual study reported decommissioning and reduced funding of DEI programmes, while two thirds (62%) of finance sector employees told the organisation their employers’ ethnic and racial diversity efforts were unchanged or worse than two years ago.

A separate study across seven countries found that Generation Z LGBTQ+ professionals perceived leaders in the finance sector as being “ineffective”, but only one in five regarded the industry as not inclusive of all sexual orientations and gender identities.

Rolling with the times

Alongside the issue of fatigue, is that of DEI’s changing face. As the world evolves – so do targets and needs around diversity and inclusion.

Unless you’ve been living under a rock, you will know that the burning topic of 2024 for many was the rise of generative AI – most evident through the widespread application of ChatGPT. The impending AI revolution is bringing many threats and opportunities across the workforce, demanding a strategic response from companies and investors.

And while some companies have reportedly turned back to more experienced hires to help them navigate the economic turbulence that has characterised the last few years – they may have to think again

“As we enter new economic cycles and difficult periods, we absolutely need new and fresh ideas,” argues Brightwell’s Douglas. “Who is best placed to be leading on the AI revolution within your business? Someone who’s embracing the technology with the appropriate aptitude. This can come from a variety of places – and assumptions about age and lack of experience can be unhelpful.”

As AI continues to drive an unprecedented rate of change, age diversity will likely become a more prominent topic, both for investors and investees.

“Processes are changing: the status quo in terms of how businesses have been run to date, and the products and services offered by the asset management industry, will be quite different,” she says. “To be successful over the next five to ten years, or even longer, there will need to be a huge shake-up in both the way we work and the way we deal with clients.”

The best way to embrace that change, according to Douglas, is to consider DEI from a business lens: treating it the same way as any other target, and incorporating it into every strategic and investment decision.

“There’s a lot of new direction, and you’ll need leadership that’s quite brave and bold to capitalise on this,” she adds. “Some people call it a revolution. I don’t know to what extent it will materialise, but it’s certainly an exciting time.”

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