Asset owners are urged to better reflect their priorities when engaging with third-party providers and underlying investments.
Diversity, equity and inclusion (DEI) themes have been increasingly featured in pension funds’ investment policies and assessment criteria for third-party providers, but research has highlighted their surprising absence in ongoing engagement efforts.
Published by pension fund advisor Pensions for Purpose, the report drew on interviews with 21 organisations – including pension funds, trustees, asset managers and investment consultants – across the UK, Europe and the US, outlining how they consider DEI across their organisation and underlying investments, as well as their approach when interacting with third-party providers.
All surveyed asset owners agreed that DEI correlates directly with business performance and have integrated such themes into their business models to varying degrees. Forty-two percent of asset owners have also implemented DEI voting and engagement polices, expecting diverse board representation.
However, the level of development of pension funds’ DEI action plans and strategies still “varies significantly”, Pensions for Purpose said. For example, almost a third have not set specific targets, and only two were intentionally considering DEI topics in their underlying investments. There also remains a “marked lack” of engagement on DEI in pension funds’ underlying portfolio companies, the report noted.
“There are pension funds doing great things on DEI, and they think about it holistically,” Karen Shackleton, Chair and Founder of Pensions for Purpose, told ESG Investor. “But those pension funds remain in the minority.”
Ninety-two percent of surveyed pension funds said they had incorporated DEI factors into asset manager selection and oversight processes, with one asset owner commended for setting explicit representation targets for prospective asset managers and mandating a minimum participation of 50% of women or individuals from underrepresented backgrounds on the investment committees of their outsourced CIO.
“However, most of these asset owners aren’t then challenging their managers [or investment consultants] to improve their DEI performance,” said Shackleton. “It’s fairly straightforward for an asset owner to bring DEI into their selection process, but beyond this DEI appears to be a consideration, not a deal breaker.”
Until asset owners start regularly encouraging third-party providers to improve their DEI performance beyond the selection process, they won’t improve, Shackleton argued.
