Social inequality has risen to the forefront of societal conversation in recent years as the tragic deaths of Black Americans, including George Floyd, Breonna Taylor, and Ahmaud Arbery, have highlighted the ongoing struggle that communities around the globe are engaged in over similar tragedies. Like in other industries, this has prompted investment management leaders to facilitate conversations about racism—a topic that has long been considered taboo in the workplace. As some leaders began to share their own experiences, many investment firms started to develop or enhance their diversity, equity, and inclusion (DEI) programs

In the second half of 2021, CFA Institute released the findings of its Experimental Partners Program (the Program): an 18‑month study that gauged the effectiveness of DEI practices in investment management firms. The Program involved 41 investment organizations (participating firms) with a combined US$26 trillion in assets under management that implemented strategies from CFA Institute’s guide, Driving Change: Diversity & Inclusion in Investment Management.

The business case for DEI

The Program found that over 90 percent of participating firms were motivated to pursue DEI work because they believed it would lead to better business outcomes. Other motivators were talent acquisition (71 percent) and an ethical or values imperative (57 percent). These findings are similar to responses collected by CFA Institute in 2017–2018, although the Program findings showed that a higher percentage of investment management firms were motivated by better business outcomes.

The business case for DEI is based on a combination of talent competition and the growing importance to clients of investing in companies with robust environmental, social, and governance practices. As a result, consultants increasingly focus on the DEI efforts of fund managers in their due diligence processes. In addition, more evidence of the performance benefits of diversity is becoming readily available in the investment industry. For instance, in November 2021, the Bloomberg Hedge Fund Chartbook reported that “women and minority-led hedge funds have outperformed their non-diverse peers over the short and long term.”

Understanding biases

The most common DEI activity undertaken by participating firms in the Program was related to understanding biases. Most participating firms had already done some work in this area, often through unconscious bias training (UCB), a concept used by companies and educational institutions since the 1930s. The Program found that the expectation has been that UCB should improve corporate culture almost immediately—but the reality was that knowledge retention was relatively low. Participating firms also found that training sessions primarily focused on bias awareness but not on strategies to manage them, due to time constraints. Overall, the Program found that training alone is not a solution to tackling biases, but that it can be effective when it is repeated and occurs at relevant times, such as during hiring periods. Other strategies used by participating firms to enhance the impact of UCB were connecting conversations about biases to current news events, as well as bringing in neuroscientists to explain how the brain looks for shortcuts based on biases—a popular session among portfolio managers and investment analysts.

Measuring DEI

With data sometimes referred to as the “next gold,” it’s no surprise that participating firms agreed that DEI data is important. The ability to measure the impact of a program or internal communications campaign can significantly improve a firm’s DEI strategy. Most participating firms used employee engagement surveys and demographic data to measure their DEI culture. Some participating firms specifically looked at promotions and retentions by demographics, adding a diversity overlay to the promotion cycles to ensure all factors were fully considered. Such metrics were part of key performance indicators used to determine compensation awards for senior leaders. One-third of participating firms tied leadership compensation to progress on culture and diversity metrics. In terms of new hires, the Program found that, ironically, low turnover rates (10 percent or less) could hinder progress towards diversity, as diversity is usually achieved through recruitment.

The main challenge participating firms had with data collection was employee self-identification, a key indicator that allows firms to build demographic profiles. Some employees were reportedly resistant to the survey, expressing concerns about being “put in a box.” As a result, participating firms found it was necessary to explain the importance of the survey: to better serve employee needs and comprehend concerns by fully understanding them as individuals. The Program considered a minimum 85 percent participation rate to be effective for the demographic data. It found that the rate was generally about 30 percent in the first year but tended to double in the second year, suggesting increasing employee engagement over time. In addition, participating firms found that it was important to prioritize a small set of key metrics for senior leadership to focus on, which the DEI team could analyze in more depth.

Overall, the Program found that successful DEI practices are based on three components:

• Leadership that is committed, trained, and accountable for DEI
• Frequent, informative, and two-way communication with employees
• Integration of DEI plans in the overall business strategy 

More DEI work to be done