Diversity test failure pt III: ESG investing is important. So is this

By Tanvi Gupta & Sayed Kadiri

Friday, June 26, 2020

In the final part of Creditflux's series in support of the black lives matter movement, we look at why CLO managers should look to diversify. They've shown they can adapt when cultural attitudes change - look at the growth of ESG investing. They need to do so again.

Previous reports in this series -

Diversity test failure pt I: Dealing with racism and breaking through the glass ceiling

Diversity test failure pt II: Broader recruitment policies and support from the top

---

Asset managers have demonstrated that if views are changing, they will adapt, they will change. That is precisely the attitude needed to ensure black people and those from ethnic minorities are given a chance to progress to the highest levels of their organisations.

Levoyd Robinson

Take the ESG (environmental, social and governance) movement for example. In the last decade, institutional investors, driven by a new generation of constituents, have advocated ESG investing, reflecting new attitudes towards the environment and social-well being. ESG investing is therefore sweeping through the credit market, with swathes of asset managers signing up to the United Nations’ Principles for Responsible Investing charter, and incorporating ESG investment frameworks. But the ‘S’ of ESG encompasses many factors, including treatment of employees. This has spurred some credit firms that are committed to ESG to quiz borrowers on the make-up of their workforces to ensure there is adequate diversity and that staff are treated well.

However, asked whether asset managers can raise the topic of employee diversity when their own investment teams are lacking, Levoyd Robinson, partner at CLO manager CFI Partners, responds: “That’s the definition of hypocrisy.”

Diversity improves decision making

But many asset managers are reluctant to rise above the parapet and be the first to drive change, even though they know it is morally right that all companies should recruit a diverse range of people and reflect the interests of all stakeholders, including their end-investors. “I would encourage any type of asset manager to look at the communities they are living in and serving, and the everyday people putting money into their pensions,” says Chicago-based Robinson.

The fact that running a company according to environmental, social and governance principles is the right way to do business is surely one of the prime reasons ESG investing has taken off.

But the case for diversity in fund management is not only moral. One ESG-focused fund manager told Creditflux that diversity has particular relevance in CLO management. “This is a small and specific sector with relatively high opacity that deals with complex, high risk investments,” says an official at the firm. “Why would you not want to bring in more perspectives? The industry faces the possibility of creating group-think by having everyone from the same background. That is clearly a knowledge and decision-making risk.”

Research into asset manager performance backs this up, argues Robinson. “There is clear empirical evidence that diverse management teams outperform,” he says. One example is a 2019 study conducted by Josh Lerner (a professor at Harvard Business School), non-profit organisation the Knight Foundation and advisory firm Bella Private Markets. It found that funds managed by firms with diverse ownership (which includes women and minorities) were over-represented in the top-performing quartile of mutual funds, hedge funds and private equity.

The way forward for finance

Recently, the NFL admitted it was wrong to not listen to Colin Kaepernick and other players when they protested peacefully in 2016. Now is the time for leaders in the CLO industry to follow suit, to listen to their staff and support the progression of black people in their firms. Then they must make the changes that will give all people, regardless of their colour, a fair chance of improving the way the industry does business.

<<END>>

TAGS: Europe People CLO CFI North America