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Incorporating diversity & inclusion in investment decisions
5 March 2021

Incorporating diversity & inclusion in investment decisions

Good investment decisions are key to successful pension schemes. Considering diversity and inclusion can achieve better investment decisions by:

1. Creating a more diverse board

2. Informing investment beliefs; diversity is part of ESG

3. Informing manager selection decisions

4. Influencing fund management decisions; considering diversity within investee companies

Diversity and inclusion can therefore be a lens in your decision-making.

A lot of different flowers make a bouquet¹

“Diversity is having a seat at the table. Inclusion is having a voice, and belonging is having that voice heard.²” While a dictionary may define diversity as differences in, for example, race, gender, culture, income or sexual orientation, in reality we all know that each one of us is unique and it is these points of difference that, when combined, create new and exciting opportunities.

Combining different perspectives has been proven to improve decision-making, as well as fostering cultural and social health, innovation and long-term sustainability in business. A person is not diverse, but a collection of people with different personality traits, experiences and skills creates a diverse team; just like the bouquet.

Pension scheme trustees are responsible for making complex and often time-critical decisions which may involve specialist knowledge in areas such as investment. As a result, the effectiveness of a trustee board is fundamental to the successful management of a pension scheme. A diverse board of trustees with complementary skills and inclusive decision-making processes will be better positioned to consider new and emerging opportunities and risks, compared with a board dominated by one or two loud voices, or where the board all approach issues from the same perspective.

Improving the diversity of the trustee board can be about attracting more diverse candidates to put themselves forward and promoting trusteeship as an opportunity for personal development, while investing in training and then recognising individuals’ different skills and taking advantage of their expertise in new areas. Training for the whole trustee board on areas such as unconscious bias, or giving top tips such as how to challenge advisers³ or how to manage behavioural biases when chairing meetings⁴ can then facilitate a whole board dialogue.

Diversity is social

Many trustee boards will have had recent discussions regarding their investment beliefs and their approach to integrating Environmental, Social and Governance (ESG) matters into their decision-making. Diversity is a key part of the ‘social’ and ‘governance’ pillars but is still an

area that is often not considered.

Over the last few years, asset managers have been receptive to client demand for ESG considerations to be accounted for in their decision making. It is evident that trustees hold significant power along with their assets, and it is vital to wield this power to drive positive change. We have been championing asset diversification as a risk management tool for years – why not apply it to people as well as asset classes?

One way to bring diversity and inclusion to the top of the agenda is to ask the right questions and highlight the importance of the subject. Next time you are faced with an ESG presentation by your fund manager, try asking questions on diversity monitoring and recruitment policies for their staff.

Miss World or a missed opportunity?

First, let’s stop using the outdated term “beauty parade”, especially when it is becoming more likely it is an all-female team you will be assessing! Gender neutral language is not a woke sensation, it is vitally important in ensuring that the diverse team you have built is also inclusive.

Research from 2020⁵ found that, globally, diverse investment teams significantly outperform those without any ethnic or gender diversity. At the same time, in the US, all-women and mixed gender fund teams outperformed all-male teams over the majority of 2020.

“Are you missing millions?”⁶, laid out the commercial incentives for focusing on gender diversity in business, and suggested a framework for assessing business’s maturity regarding gender equality: foundation, defined, advanced and leading.

Challenge your fund managers to explain how they consider diversity in their investment decisions. In the same way that we woke up and realised that investing in well governed companies that do not destroy communities or our planet turned out to be good for performance, we will soon realise that diversity and inclusion provides sustainable financial benefits too.

Using a diverse lens

This article demonstrates how to use diversity and inclusion as a lens in investment decisions, but it can be used successfully in many other areas of pension schemes too. Aon’s guide ‘Practical Diversity and Inclusion for Trustees’⁷ covers practical steps in trustee selection, trustee decision-making and investments but also wider issues such as member communications, actuarial factors and other difficult trustee decisions.

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Last update: 11 March 2021

Geri McMahon
Geri McMahon
Responsible Investment
Jennifer O’Neill
Jennifer O’Neill
Responsible Investment

Interim Pension Officer/Manager - In House 18m FTC

Salary: £50000 - £70000 pa

Location: Northamptonshire

Pensions Administrator - W. Yorkshire

Salary: £23000 - £29000 pa

Location: West Yorkshire

Pensions Administrator - Hampshire

Salary: £20000 - £30000 pa

Location: Hampshire

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