Asset allocators should prioritise creating their own accountability system for diversity, equity and inclusion in 2022 according to Jason Lamin founder and chief executive of DEI specialist Lenox Park Solutions.
Lamin says processes and behaviours including regularly reporting to the board, whether formally or informally, become a catalyst for change.
“One of our clients’s CIO reports regularly on DEI to its board and by doing that the staff, executive management team and CIO have to get very serious about what they are going to be reporting on,” Lamin says.
Importantly these practices can address the structural barriers to improvement such as goal setting.
“It comes down to fundamental business management, that is the only way this works,” he says. “Clients that want to check a box will fail. The only way it works is organic, bottom-up change that starts with being accountable and that rolls into data and measurement.”
Lamin advocates reporting to some governance structure and some level of accountability as an important catalyst. What comes next is measuring progress with analytics that give context to the entire industry.
“People want to know what to do on Monday morning. One of the biggest impediments to DEI advancement is we have made the discussion in rhetoric and have laid out grand expectations but come Monday morning when I get to the office what do I do?”
Lenox Partners, whose work is rooted in a metrics-driven approach, now has asset owners with combined $5.5 trillion as clients including CalPERS, Illinois Teachers, Mass PRIM and New York State Common. Financial services clients include JP Morgan, Prudential and NY Life.
Lamin says being able to scientifically measure DEI is an important step in incorporating it into decision making and has developed a statistically rigorous methodology to rank asset management industry participants on diversity data.
The Lenox Park Diversity Impact Score (LPI) is calculated using 10 components related to gender and ethnic diversity data for firm ownership, leadership, and total workforce. The score is constructed so more components – such as disability, LGBTQ and gender pay equity – can be added as the data becomes available. Clients survey their managers collecting data to create the score that can be used as a benchmark for change. The score is shared with the client, and the underlying managers.
Holding managers to account
While asset owners in many ways set the rules for DEI among their managers, Lamin warns against setting those rules in terms without context.
This means asset owners demonstrating they have also made progress in their own organisations so there is a collaborative effort to improve the industry.
“LPs showing they have done the work goes a long way to bringing the GPs into the conversation,” he says.
In a peer-aware industry such as financial services Lamin also says measurement needs to be meaningful to the market.
“Measurement needs to mean something in the market which is why the peer score is important. There needs to be realistic benchmarks and expectations of the manager.”
For example he says different asset classes need to be treated differently, pointing to real assets versus public markets where the demographic makeup among managers is very different.
“If we set goals as a blanket x per cent in all asset classes we are not meeting the market where it is,” he says. “We need to be realistic on what the expectation should be and put the scores into context, that’s important.”
The foundation space has been the fastest moving of all institutional investors in the adoption of the LPI metric for assessing DEI among their managers and Lenox Partners is now the standard.
“That makes it easier for everyone. The foundations can hold their mangers accountable and it makes it easier for the managers to have a clear idea of the expectations of them. Our technology makes it easier for all sides. That’s happening most clearly in the foundation space.”
Lamin says when investors have tools they can change behaviour very quickly and this is true for DEI scores also.
“I was surprised at how quickly the decision makers on the allocator side have incorporated the analytics into their decision making,” he says. “One [large pension fund] client already says to managers they need to disclose their DEI score in order to be considered by the investment committee. It’s not exclusionary but is another metric to assessment, we think that is a huge advancement.”