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How DEI Can (Finally and Fully) Be Incorporated Into the ESG Investment Process
Diverse manager programs are not new, but they are undergoing a serious makeover.
If the Covid pandemic had a silver lining for asset management it’s that diversity, equity, and inclusion (DEI) seems to have finally established a significant and permanent place in the now and future of the industry. It’s difficult to pinpoint why that’s the case – perhaps people have had more time to reflect, or perhaps they’ve developed a new appreciation or view of teamwork – but the “why” is less important than the fact that it happened.
From an investment strategy standpoint, a logical next step is for ESG investing to practically incorporate DEI considerations into the investment decision-making process. It turns out that two of the top three themes across ESG investing right now involve DEI and stewardship, which is closely tied to DEI.
“Human capital and diversity issues are front and center in ESG investing right now,” says Julie Moret, Global Head of Sustainable Investing and Stewardship, Northern Trust Asset Management. “Social unrest driven by the pandemic has revealed a fragility in certain segments of the economy, such as the gig sector in leisure entertainment, and workers realize they have very little protection. This has created greater awareness of how interconnected people, planet, and profit are – really accentuating the ‘S’ in ESG.”
What Moret refers to as purposeful stewardship helps identify business relevant ESG issues during portfolio construction for investors and extends how Northern Trust Asset Management raises important issues with management and boards in the companies in which it invests.
At the end of the day, according to Moret, ESG and purposeful stewardship are inextricably linked.
“ESG is about informed investing,” she says. “As an investor, you’re looking at ESG information because it is additive. It helps create deeper understanding on the future resiliency of businesses. To the extent that ESG criteria are important when selecting securities and constructing portfolios, it stands to reason that as you are allocating capital to these businesses you will engage with them through your stewardship duties by raising ESG issues with the ultimate view of lifting ESG standards. Improved standards around management of ESG issues supports effective long-term financial performance.”
A shifting definition of “diverse”
At Northern Trust Asset Management, part of advancing DEI within ESG investing is to view the asset management industry itself through a finer lens and raise expectations.
“Diverse manager programs have been part of the investment management landscape for many years,” says Jessica Hart, Retirement Lead, Outsourced Solutions, Northern Trust Asset Management. “In that sense, asset owners would look to incorporate women- or minority-owned managers within their investment program. Broadly speaking, however, we can all agree those programs alone were not enough for the industry to achieve as much progress as we would all like to see.”
The lack of widespread success regarding DEI drove Hart and her colleagues at Northern Trust Asset Management to a realization that the term “diverse” in the context it was traditionally used (firms 50% owned by women or minorities) is too narrowly defined.
“It doesn't tell you anything about whether those firms are truly embracing diversity in the way they build teams, the way they hire individuals, and the way they incorporate it across their culture,” says Hart.
As a result, Northern Trust Asset Management has begun using a 360-degree view in the way it assesses an investment management firm’s commitment to diversity. “Ownership is still a portion of our assessment, but we want to more deeply understand the firm,” says Hart. “We want to understand who works on the investment team, who works on the leadership team, who’s on the board. We want to understand supplier diversity practices and community engagement. And,importantly, we want to understand for asset management firms of every size, from small and mid-sized to trillion-dollar asset management firms, because every firm should be held accountable for the way they’re embracing diversity within the business and outside it, too.”
Learn more about how to take a more multidimensional approach to diversity investing.
Northern Trust Asset Management (“NTAM”) is composed of Northern Trust Investments, Inc. Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K, NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Belvedere Advisors LLC and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
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