The goal of widening the opportunities for investors to include a more diverse cross-section of the US population has animated some recent government-backed initiatives. Not everyone agrees there is a problem that needs fixing or that the fixing is something financial services firms should be a part of, which makes these initiatives problematic.
But studies show that demand from investors for diversity and inclusion data and progress is on the rise, including metrics on asset managers’ investment team diversity in requests for proposals. According to the recent CFA Institute Earning Investors’ Trust study, 76% of institutional investors and 69% of retail investors have interest in investment design and products that incorporate environmental, social, and governance (ESG) factors, with a growing number of investors prioritizing racial diversity and justice issues in particular to create a more inclusive investor landscape.
Let’s look at two recent programs designed to do as much.
Citigroup’s push for more diverse asset managers
US megabank Citigroup Inc has created (and gained US government approval to use) a worker retirement plan it created specifically to achieve racial diversity objectives without running foul of strict federal benefits laws.
The US Department of Labor (DOL) granted Citi an advisory opinion last week that carves out a path for the company to prioritize diverse asset managers to oversee its workers’ 401(k)s.
The Racial Equity Program involves a commitment by Citi to pay all or some portion of the investment management fees for “diverse managers” retained by Citi-sponsored employee benefit plans.
Citi told the DOL that its experience has been that diverse managers’ market share lags their representation in the asset management industry for reasons unrelated to risk-adjusted returns. Citi states this underrepresentation exists even though studies show both that such managers perform as well as or better than median performers and also that diversity itself may mitigate volatility.
Citi’s goal is for the program is to help address such systematic disadvantages in the context of Citi’s own employee benefit plans.
The money used to prioritize diverse asset managers comes directly from Citigroup as a corporate entity, not plan assets, which are generally at least partially made up of participant contributions.
GRIP’s take: Although the plan creatively uses corporate money and not plan money for this novel initiative, and got DOL’s blessing to launch, the project is going to be the subject of a lawsuit for sure. Financial services firms have faced such lawsuits – and recently proposed laws – launched by Republicans who claim these asset management goals have subverted workers’ benefits and undermined fiduciary duty principles by favoring environmental, social, and corporate governance investing factors.
By lowering the costs diverse companies would otherwise charge for their services, Citi would be giving diverse service providers an advantage – a unique perk it must be prepared to defend in the courtroom.
California’s VC diversity reporting law
Last week, California took a significant step to stimulate greater diversity in the venture capital (VC) world, becoming the first state to pass legislation on diversity in the VC space by requiring the vast majority of them to report on the demographics of the founders in whom they invest.
Studies have highlighted the VC arena’s lack of diversity, making this new law a critical move toward fostering a more equitable startup ecosystem.
The law will affect even VC firms outside of California, as it extends to firms that either invest in California companies or raise money from California investors.
GRIP’s take: California accounts for nearly 50% of the world’s venture capital today, so the new rule will have a huge impact on VC reporting and greater public insight into where VC money is flowing. Nothing about the law imposes a mandate on reaching any quotas, as it’s merely about disclosure, and information about the ownership of firms in which people invest (such as race and gender) just arms such investors with more information they could find useful in making investment-related decisions.
