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From Wall Street to Bay Street, racial inequities in the investment industry have been prevalent since stock exchanges were established. When a range of instances of systemic racism made headlines over the last year, SRI investors (who try to ensure their investments are sustainable, responsible and impactful) were head-down in meetings strategizing about what they could do to address racial disparities at the corporations they engage with.
SRI investment professionals, after all, collectively determine where to invest and divest trillions of dollars (US$40.5 trillion and counting), which positions them to move the dial on a variety of topics – including corporate performance on diversity, equity and inclusion (DEI). After a wave of CEOs pledged their solidarity with Black Lives Matter protesters in the spring, investors themselves started making broad industry commitments around DEI. In June, the Racial Justice Investing coalition of 128 institutional investors in the U.S., managing approximately US$2 trillion in assets, issued a statement of solidarity with anti-racism protesters and a call to action to address systemic racism. “We are seeking to use our wealth and class privilege to push toward racial justice and liberation, including pressing large employers to be more inclusive and to pay people equally regardless of race,” said Pat Miguel Tomaino from Zevin Asset Management, one of the endorsing institutional investors.
In October, Canadian institutional investors managing more than $2.3 trillion in assets signed the new Canadian Investor Statement on Diversity & Inclusion, an initiative coordinated by the Responsible Investment Association. By late November, BlackRock, the world’s largest asset manager, along with Nasdaq and Goldman Sachs, vowed to start pushing companies for greater racial and gender board diversity in 2021.
The progressive world of SRI investing may have a strong orientation toward creating an equitable and sustainable world, but it has an unfortunate contradiction. SRI firms are maintaining the status quo with an exclusive culture that’s made up of predominantly white professionals, particularly in senior and executive roles. Since 2017, ESG teams have grown by 229% globally, but while statistics are lacking in Canada, roughly 80% of SRI professionals in the U.S. are white, even though they make up approximately 60% of the wider population (and just 45% in major cities like New York and Chicago).
They’re not just failing to employ people of colour and provide opportunities for these professionals to advance; they’re also dropping the ball when it comes to investing in funds managed by people of colour.
At this point, the pot and the kettle seem to be the same colour. As Narinder Dhami, managing partner of Marigold Capital, explains, “Even though we talk a big game on diversity, we fail to see it applied in any meaningful way in impact investing.”
Some SRI professionals are owning up to the disparity. Matt Patsky explained to Bloomberg why his firm, Trillium Asset Management, with more than US$3 billion in assets under management, should get a “C” in DEI. He acknowledged that while his firm pressured investors to divest from South Africa during anti-apartheid struggles, just 10% of his 44 employees are racialized. “We have to start walking the talk and make the same changes we’re asking companies to make.”
“Even though we talk a big game on diversity, we fail to see it applied in a meaningful way in impact investing.”
— Narinder Dhami,
managing partner of Marigold Capital
Principles for Responsible Investment (PRI), a UN-supported network of approximately 3,000 global signatories based in London, England, works to incorporate ESG (environmental, social and governance) criteria into the more than US$100 trillion that they collectively manage. But while PRI may be the “world’s leading proponent on responsible investment,” which includes advocacy on DEI, they too acknowledge that “we aren’t where we want to be” in terms of diversity: just 22% of PRI’s employees are people of colour – when 40% of London is racialized.
Closer to home, the McConnell Foundation, a leading Canadian organization in the impact-investing space, has an admirable mission to build “a more inclusive, innovative, sustainable and resilient society.” However, almost 90% of its impact investments are in organizations founded or led by white Canadians. In 2019, the McConnell Foundation launched a Solutions Finance Accelerator to direct private capital to areas with significant needs. Of the nine participating intermediaries in this program, 44% are led by women and 22% are led or co-led by Indigenous people; however, the advisory panel for this accelerator consists entirely of white Canadians.
When approached by Corporate Knights, the McConnell Foundation acknowledged the problem. “We would agree with your assertion that the investment community in Canada continues to show a lack of diversity and that this reality is also reflected to a large extent in our own portfolio.”
Earlier this year, the McConnell Foundation committed to setting up an internal racial-justice working group to explore how to embed DEI principles more broadly in its granting and investing. Said a foundation representative, “The continual improvement of our practices is important. We know that we must, in every part of our activities, apply an equity, diversity and inclusion lens.”
While there is little doubt that these impact-driven organizations are focused sharply on creating equitable communities, until the sector addresses its own systemic racism and bias, research reveals that its work is bound to fall short.
The value of having people of colour leading SRI work goes well beyond boosting financial performance and innovation.
How does the lack of diverse leadership in the investment industry affect financial performance? The difference is noteworthy. Investment professionals who have similar life experiences often make decisions from a similar perspective, which can lead to overlooked opportunities. Studies have shown that the more similar the investment partners, the lower their investments’ performance. For example, the success rate of acquisitions and IPOs was 11.5% lower, on average, for investments by partners with shared school backgrounds than for those by partners from different schools. The effect of shared ethnicity was even stronger, reducing an investment’s comparative success rate by 26.4% to 32.2%.
In a time when companies that are innovative are more likely to withstand the tsunami of changes to our geopolitical, environmental and social contexts, it’s more important than ever to build diverse teams. Studies show a correlation between the diversity of management teams and overall company innovation. The BCG Henderson Institute found that companies with above-average diversity in leadership generated 45% of their total revenues from innovation, while their less-diverse peers saw 26% of revenue coming from innovation.
The value of having people of colour leading SRI work goes well beyond boosting financial performance and innovation. SRI investment professionals engage with companies on advocacy, benchmarking and problem-solving to improve ESG outcomes that benefit our society and our planet. It’s essential that Indigenous and communities of colour that have been at the epicentre of the consequences of irresponsible corporate practices and devastating pollution have a central role in the SRI investing space. In many cases, racialized and Indigenous professionals bring lived experience to the table, and a nuanced understanding of proposed interventions and opportunities, potentially preventing well-intentioned initiatives from having negative impacts or consequences.
What can be done
In early October, Diversity in Sustainability hosted a workshop in Toronto at which 25 women of colour spoke about the challenges they faced as sustainability professionals, including having to forge their own paths without existing networks, actively feeling invisible, and being subject to micro-aggressions. If your firm wants to ensure you’re tapping into the diverse and extensive knowledge available in the field of SRI, first acknowledge that professionals of colour experience significant systemic barriers. Make an effort to expand your network and hire candidates who bring different perspectives to the table.
In addition to investing in diversifying your team, work on diversifying the companies that earn your investment dollars. An increasing number of funds, organizations and programs are being created and led by Indigenous and people of colour. Marigold Capital’s founder had been told throughout her career that she didn’t “have the right face to lead efforts,” and now she is one of the very few women of colour in Canada managing an impact fund that actively seeks to invest in companies and founders that have been overlooked. Raven Capital is also working hard to transform how and where capital is allocated, with its keen focus on Indigenous entrepreneurs and communities.
While businesses that target diversity are thriving, actual diversity is not. Deeply entrenched systems of bias – and, let’s face it, racism – can change only when leaders go beyond making statements and pledges. If SRI investment professionals want to play a credible role in influencing corporate behaviour on DEI, they’ll have to look within. To create change, the SRI community needs to articulate clear goals and actions that disrupt systems of bias, not just in the companies they invest in, but in their own firms and foundations.
There has never been a more opportune time to disrupt deeply entrenched systems that are keeping your company from being competitive on the global stage. Seize the moment.
Shilpa Tiwari is the founder of Her Climb, a social enterprise with the mission to increase the number of racialized women in senior positions in corporations.
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