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Systemic racial bias is apparent in the investment industry, where people of color receive significantly less investment capital and face bias in the underwriting and allocation process, despite performing as well as (or even better than) their white peers. In many cases, asset owners promote equitable access to opportunities through their missions and programmatic objectives, and yet the capital gap persists. And differences in capital allocation are merely the tip of the iceberg — a tangible indication of the organizational structures and entrenched systems that drive biased outcomes.
In 2017, Global Endowment Management (GEM) — a full-service outsourced investment firm (or OCIO) stewarding nearly $10 billion on behalf of primarily mission-driven clients — began to reflect on how and why our efforts to build a more diverse and inclusive firm were not leading to the results we wanted. Today, after more than two years of focused and consistent effort, we have changed many of the processes and systems that impeded our progress, and we are beginning to see tangible results. Our work has only begun, and we are humbled by all that we are learning with each step forward. We hope that sharing our experiences, challenges, and lessons will help other investment firms — particularly historically white firms — take actions now that can lead to long-term change at their firms and across our industry.
Investment firms — like all successful businesses — have no shortage of experience assigning ownership for objectives, tracking progress, and rewarding results. Advancing diversity, equity, and inclusion will not happen until we elevate this work to the same level as other strategic decision-making by establishing objectives and incorporating them into our existing accountability frameworks.
In 2018, we launched GEM’s Diversity and Inclusion (D&I) Committee, led by our Chief Investment Officer with representation across every team and at every level of the firm. The committee was charged with three objectives: developing a shared definition for diversity and inclusion; evaluating our existing diversity and inclusion practices; and developing a strategic plan to address the most pressing challenges and greatest opportunities. This work resulted in naming a Director of Diversity, Equity, and Inclusion Advocacy in 2019, who is responsible for the implementation of the D&I strategic plan and is supported by the D&I Committee.
At the same time, GEM’s investment sourcing team took responsibility for building up the pipeline of diverse investment opportunities. We incorporated this objective within an existing “Area of Interest” framework, an internal process where we spend several months expanding our networks, engaging experts, and developing our knowledge and perspective on a particular area of the market. In this case, we spent a year mapping diverse-led investment firms working across asset classes and around the globe, with a specific focus on Black, Latinx, and Indigenous people and women.
In 2018, we increased our pipeline of diverse investment managers by 10 times; in 2019, approximately 25 percent of nearly a thousand investment opportunities we reviewed were diverse. In 2018 and 2019, more than 40 percent of the strategies added to our portfolio had material representation from men and women of color and white women at the ownership and investment decision-making level. Importantly, the same rigorous investment evaluation process was employed during that time.
Invest In Learning
Investment firms rarely have the training and expertise to address systemic bias. Before we take action, we need to better understand the issues we aim to address to increase the likelihood of effecting positive change and to avoid causing harm. At GEM, we began by auditing our practices, rolling out a series of learning opportunities and trainings, and seeking to understand our role in the context of our industry and our local community.
We partnered with the Kaleidoscope Group to administer a firm-wide survey to assess diversity, equity, and inclusion practices at the firm. They worked with the D&I Committee to interpret the results of the survey and establish clear, actionable objectives, which were incorporated into our D&I strategic plan.
Several members of our team participated in the Racial Equity Institute’s training on institutional racism, which provides a historical, cultural, and structural analysis of racism. Beginning in 2020, all employees will participate in this (or similar) training. This helps put institutional racism into context and allows for understanding, which is the necessary starting point for changing those systems.
We also learned about our local community. In 2017, a team of researchers led by Stanford Professor Raj Chetty found that Charlotte, where GEM is based, ranked last out of America’s 50 largest cities for economic mobility, which disproportionately impacts Black and Latino families in Charlotte due to the history of segregation and Jim Crow laws that shaped the American South. Our employee-led GEM Foundation and our Community Engagement Committee partnered with local leaders and community representatives to learn about the underlying issues contributing to the lack of economic mobility and some of the leading initiatives addressing the issue. This developed into a set of strategic priorities for our corporate giving and employee engagement.
Change Your Process
Unfortunately, studies demonstrate that diversity training is often ineffective in changing behaviors; we cannot simply “learn” our way out of racial bias. We must review and address the processes that unintentionally reinforce bias. Two areas we focused on were our hiring practices and investment manager review process. We know that these are areas where bias is particularly persistent and can have significant consequences when overlooked.
After mounting frustration with the lack of qualified diverse candidates from headhunters, we partnered with Management Leadership for Tomorrow, a leading source of diverse talent, and The Muse, a platform that supports companies to attract and hire diverse talent. Both organizations provide support that not only enhances our candidate pool, but informs how we interview, hire, promote, and retain diverse team members. As one example, we instituted “blind resume reviews” into our screening process, meaning that hiring managers cannot see the names or factors that could potentially convey race or ethnicity during the candidate screening process.
We also expanded the schools where we recruit from 10 to 30, adding additional Historically Black Colleges and Universities (HBCUs), such as Hampton, Howard, Morehouse, and Spelman, and universities with more diverse student bodies, increasing the likelihood of identifying diverse talent within those schools. Since 2018, 78% of new hires have been women and people of color.
On the investment front, we added a “second look” process for all diverse fund managers. All diverse funds are reviewed by at least two principals prior to our decision not to move forward with the investment. In practice, this results in more robust discussions and review of diverse-led investment strategies in our pipeline, and has resulted in additional allocation to diverse fund managers.
Establish Your Starting Point
Benchmarking is the cornerstone of the investment industry, with most of us adhering to the view that we must “measure what matters.” In the same way, historically white firms must take stock of the present to benchmark their progress and maintain accountability.
We began tracking the racial/ethnic and gender diversity of our portfolio in 2017, using team member knowledge of how investment managers identified. In some cases this was straightforward; in others, quite difficult. We are continuing to improve our system for identifying, measuring, and tracking diversity, but the lack of comparable internal data means that actionable judgments about our progress cannot yet be made.
In 2020, we are refining our definitions of diversity, racial equity, and social equity as three distinct features of each investment opportunity — diversity referring to who owns or makes decisions, and social and racial equity referring to how the firm operates and executes with an equity lens. This evolution is important, and reflects what we have learned in practice; but the lack of data from our starting point is again a frustrating limitation to measuring progress.
We recommend incorporating metrics related to diversity, equity, and inclusion into the due diligence process today to establish a baseline for future progress. For firms that are concerned about how fund managers will respond to questions, include an option for declining to answer. In our experience, very few firms select that option.
We know that diverse teams make better decisions; and yet, in 2017, we recognized that our efforts to build a more diverse and inclusive firm were not leading to the results we wanted — and that we needed to change our approach. Perhaps the most important lesson we have learned so far is the value of moving forward in the face of difficult questions with unknown answers. When we launched our Diversity & Inclusion Committee, we did not have a roadmap for which actions to take, nor a vision for where they would take us. But today, we are a more diverse, more inclusive, and stronger firm for having started the process. Our industry is just beginning the slow and challenging work of uncovering, confronting and changing biased systems. This change will not happen overnight, but it will happen if we convert our good intentions into durable commitment.