Diversity, equity, and inclusion (DEI) have emerged rapidly in recent years as corporate sustainability variables, including in the investment industry.

But are investment managers going beyond corporate DEI policies to integrate DEI in investment decision-making because of an anticipated performance impact?

Discussions with Canadian asset managers and owners indicate that DEI is being integrated with an increasingly robust framework as an investment variable.

DEI came to the fore due to the unequal impacts of the COVID-19 pandemic along the lines of gender and socioeconomic variables and a spate of racial injustices in North America. Under growing social pressure, many corporations and industries began broadening longer-standing gender equity commitments to include racial and non-binary gender equity, and other DEI commitments.

The investment industry also acted. For example, the Portfolio Management Association of Canada has a DEI standing committee. Building DEI into investment frameworks is a different matter, though. The investment industry is already struggling with transparency and consistency in other sustainability areas, such as climate risk. DEI is much newer as an investment variable.

Industry DEI investment pledge

The Responsible Investment Association (RIA) surveys Canadian industry trends annually. In its 2022 Responsible Investment Trends Report, 80 percent of respondents ranked board diversity and inclusion as a key investment variable, just behind greenhouse gas emissions and climate change mitigation. Following these, tied as the fourth highest ranked investment variable, were broader DEI considerations and human rights, both ranked as key variables by 79 percent of respondents. ¹

In 2020, the Responsible Investment Association (RIA) helped launch the Canadian Investor Statement on Diversity and Inclusion, committing signatories to integrate diversity and inclusion in their investment processes. As of December 2021, 56 institutional investors representing over CA$3 trillion in assets under management had signed.

“That was a good way to come together as investors to say, this is a priority for Canada,” says Rosa van den Beemt, Director of Stewardship, Responsible Investment at BMO Global Asset Management, one of the signatories. “It committed signatories to prioritize diversity goals beyond just gender in our investment processes, including through engagement with investee companies.”

BMO GAM assesses DEI impacts as part of a more comprehensive social equity framework. BMO GAM believes that social inequality and climate change “pose systemic risks across sectors and markets,” van den Beemt says.

In its investment stewardship, BMO GAM looks for corporate boards and executives that prioritize DEI; organizational DEI targets that are consistent and transparent; and products, services, or conduct that advance racial equity.

Although still limited, van den Beemt also sees more Indigenous representation on boards of Canadian resource extraction companies.

“When you are working in a very challenging ESG environment, having diverse representation on your board overseeing those ESG challenges will help your company in the long run,” she says.

Canadian investors are also active in global investor DEI initiatives. Six large Canadian public-sector asset owners belong to the global Investor Leadership Network (ILN), which focuses on sustainability and long-term growth. François Crémet, CFA, Senior Director, Sustainability at Caisse de dépôt et placement du Québec (CDPQ), co-led the development of ILN’s Inclusive Finance Playbook, which group members are integrating into portfolio assessment and engagement.

“We want to be at the table,” Crémet says. “By collaborating with our peers, as well as governments, investee companies, and NGOs, we want to contribute to shaping the agenda both in Canada and globally, and make sure we use our expertise, our resources, and our influence to make progress with our peers on such an important topic.”

Asset owners turning the screws

Asset owners have begun screening potential managers for DEI. Crémet says CDPQ has a specific DEI manager assessment grade and has broadened its candidate pool for external managers to be more diverse.

In June 2022, the Principles for Responsible Investment (PRI) issued a model due diligence questionnaire (DDQ) to help asset owners assess DEI integration in investment manager and consultant organizations and investment decisions. The PRI is one of the world’s largest investor organizations, with over 5,000 members representing over US$120 trillion in assets under management as of September 2022.

“We know clients are receiving those DDQs,” says Michelle de Cordova, a principal at ESG Global Advisors. “Asset owners are focusing more on diversity on investment teams and within firms. The motivation seems to be that a diverse perspective has the potential to improve decision-making.”

DEI is also being integrated into private market decision-making. The US-based Institutional Limited Partners Association has a Diversity in Action initiative, committing both limited and general partners to greater organizational diversity, including the exchange of DEI data on all new funding commitments and fund raises. The ESG Data Convergence Initiative also commits members to report consistent and meaningful data in six categories, including diversity. The initiative covered over 250 general and limited partners representing assets of about US$25 trillion as of December 2022. ²

Investee entities are responding increasingly constructively on DEI engagement. At BMO GAM, Jennifer So, CFA, manages the Women in Leadership Fund, which screens portfolio candidates on fundamental valuation metrics and gender equity practices. She says the battle to attract and retain talent has made DEI a business imperative, and portfolio managers no longer have to convince company management of its importance.

“Labour is one of the biggest line items on an income statement. Companies can’t turn on a dime on that,” she says. “Access to labour was a big issue even before the COVID-19 pandemic, and it’s going to be a problem for a long time. If (because of too narrow an approach to diversity) you’re only pulling from a subset of the population, you’re going to be disadvantaged.”

Growing pains

The growing number of investor and investee DEI integration initiatives produces the kind of inconsistencies that have plagued climate risk investment decision-making. Even global standard setters like the Sustainability Accounting Standards Board (SASB) and Global Reporting Initiative (GRI) have different approaches to DEI. Regulation has not always been helpful, either. In the US Securities and Exchange Commission’s 2020 amendment of its Regulation S-K filing requirements, the commission declined to use prescriptive language around newly introduced human capital disclosures that could have helped set best practice standards.

To address the lack of a broad, consistent assessment framework, ESG Global Advisors conducted its first survey of North American companies and employees in 2022 to establish benchmarks for emerging corporate practices around social risk factors, including DEI. A total of 73 organizations responded to the survey, The State of Social in ESG, conducted in partnership with the public relations firm Argyle.

“Most companies do face some kind of social risk or opportunity that is material. These issues are a huge priority for investors,” says de Cordova. “As social risk factors show up more in investor stewardship practices, benchmarking the data will be important.”

CDPQ’s Crémet says that the benefits to investors and investees mean that DEI integration will continue. “It’s a way for organizations to be more innovative, to attract and retain the top talent, and to have a more comprehensive view of value creation opportunities and of the risks facing an organization,” he says. “Integrating DEI into our investment decision-making helps make the organizations we invest in more resilient, and that’s true for us as investors as well.”