Joe Biden has come to the presidency with all the ingredients for success however there are a number of sweeping global trends underway that will continue whoever is in the White House. Professor Stephen Kotkin examines these trends and looks at where there may be geopolitical risk under a Biden presidency.

There will be a peaceful transition to Biden’s presidency, although Trump may well continue his harmful campaign and not show up for his successor’s inauguration, predicted Stephen Kotkin, Professor in History and International Affairs at Princeton University speaking at FIS Digital 2020. In a sweeping analysis of key factors set to influence Biden’s presidency, Kotkin urged delegates to pay attention to the results of the election. “Trump lost: The Trump phenomena isn’t enduring; in fact the fade is already underway.”

However, he said Biden will have little influence on the sweeping global trends underway. The technological revolution visible across healthcare to agriculture and energy will continue unabated. “Biden will have very little influence on this colossal disruption in our lives,” said Kotkin. Moreover, the growth of the middle class in developing nations and the ageing demographic that now characterises countries in Europe and Japan, bringing both investor risk and opportunity, will continue whoever is in the White House. “This simultaneous greying and vast expansion of the middle classes is happening in tandem in China. Investors mustn’t miss out,” he said.

Kotkin warned investors that the Biden presidency offers no solution to the enduring challenge of measurement either. From GDP data to shareholder value, the tools economists use to measure productivity and what is rewarded are under serious challenge, he said. “This is of massive importance to investors but has little connection to the Biden presidency.”

However, Biden may impact geopolitical risk. Kotkin flagged shifting sands in the Middle East as countries in the region (with youth bulges needing jobs) gravitate to emerging tech giant Israel as their own oil economies flounder. “Israel is a technological giant, and the Arab states want technological transfer. They can see that the future of hydrocarbons is uncertain and that basing their wealth on oil no longer makes sense. They need a new economy, and Israel is a potential partner.”

He said that Iran’s influence has been countered by technological breakthroughs around fracking. But Biden needs to tread carefully. “It is the coalition against Iran that is driving the Arab-Israeli rapprochement,” he warned.

 

Turning to the EU, Kotkin said Brexit illustrates the challenges of sovereignty in an interdependent world. As ‘deal’ or ‘no deal’ rumbles on the UK (at the time of writing) Britain is finding it can’t be fully sovereign if it also wants to take advantage of interdependence. “The Brexit vision is based on an impossibility. You can’t be fully sovereign in a world where you sell 70% of your fish to the EU.” In a nod to the EU’s global regulatory influence, he noted how the EU can “impose rules” across the world when countries want to sell into its giant market, furthermore the fact that the EU is a regulatory giant is often overlooked because it has little military influence. “Issues to do with EU regulatory power are not easy to overcome.”

Kotkin downplayed the Brexit drama relative to other growing challenges in the EU. None more so than the inherent conflict between monetary union without fiscal union, and the rise of new illiberal regimes in Eastern Europe like Hungary, Poland, Bulgaria and Romania. “The EU has been more proactive recently about the erosion of democratic law. But it has limited tools and if it fails to take action over the illiberal trend, it could damage its survival.”

Turning his focus to China he noted the enduring digital divide that is seeing the development of diverging US and China spheres. “You are either in China’s 5G or someone else’s, you use China’s undersea cables or someone else.” But Kotkin urged countries to develop coherent China policies that combine deterrents and diplomacy. “China is not going away, and the world needs to figure out how to live with China.”

He suggested coalitions to encourage integration and mutual benefit over issues that don’t threaten national security instead of bans and shutting out. “Biden has a big role to play, we will see if up to the role.” Elsewhere, he flagged opportunities for cooperation around climate change where innovation in the US has plateaued, particularly around renewable storage and capacity. “We require significant private sector solutions,” he said.

Kotkin concluded that Biden has come to the presidency with all the ingredients for success. The vaccine is rolling out and there is the potential of an economic revival. He is also riding a popular wave and a civil war is ripping through the Republican party. But he also warned that headwinds could crimp his ability to succeed.

Coronavirus vaccines are being rolled out in various jurisdictions – including the UK and Russia – but it will take at least an additional two years from now to eradicate the pandemic, according to health experts.

Speaking at FIS Digital 2020 Dr Ian Norton, founder and managing director of Respond Global and the former global head of WHO’s Emergency Medical Team Initiative warned the 185-odd asset owner attendees with a collective $11 trillion assets under management that a long road to normal still lies ahead.

“We’ve never seen a pandemic end in less than two years,” he said.

Now the key challenge lies in the logistical and supply chain challenges of rolling out the vaccine. Moreover, success depends on the vaccine reaching all corners of society, and all countries in the world.

“We can’t just look at one country’s management of COVID; each country is only as strong as global management. International borders won’t open until we have got rid of the bulk of the disease.”

And all the while fresh spikes will occur.

“It’s not over; there are several waves to come.”

There are investor opportunities with regard to bio-medicine that have been highlighted by the pandemic, and the innovation around the vaccine development, and the focus should be on ongoing technological innovation, said Kari Stoever chief external relations officer at On Demand Pharmaceuticals.

She also highlighted the need for innovation around cold chain storage and flagged that healthcare supply chains will increasingly onshore.

“The global supply chain won’t go away but we will see a shoring up of domestic manufacturing to meet rapid demand responses to surges,” says Stoever, who recently wrote the document for President-elect Joe Biden on the future of pharmaceutical manufacturing in the US.

Indeed, fierce nationalisation regarding healthcare provision is a key lesson from the pandemic, said Norton who noted how manufactures in the West closed off their supply to developing nations.

“We will see more regionalisation of supply,” he predicted.

Norton, whose experience includes coordinating WHO’s emergency health response to Ebola in West Africa, also forecast a rebound in demand for healthcare away from COVID-19 that stretched governments won’t be able to meet. Expect a hybrid of ethically-driven businesses to fill the gap, he said.

Reflecting on why the US has struggled to contain the pandemic, Stoever said that successful policy depends on both top down and bottom-up strategies.

“In the US there has been a failure at both levels,” she said.

The challenges inherent in mandating behaviour depend on successful public education. Moreover, she flagged that gaps in public education in the US could impact vaccine take up.

“I am already seeing a lot that worries me like unsubstantiated claims about safety; I hope these don’t scare the public,” she told delegates.

Noting the different levels of resistance across the US at a community level to public health messages, she said: “We live in an individualistic society and people are seeing their rights violated.”

Adding again that changing that message to one of interconnectedness won’t ever be heard without top down, bottom-up messaging.

Panellists heard how America’s travails contrast with countries like South Korea, Australia and many African countries which have successfully got their public health message across.

“It is about taking people with you,” said Norton who witnessed first-hand Liberia’s success in containing Ebola. “Liberia invested in a public health message and Liberia got rid of Ebola.”

Similarly, South Korea, which learnt early lessons from MERS, has got the virus under control but he noted that “alternative news” makes public messaging difficult.

Norton also reflected on the challenges facing WHO.

“It is an underfunded agency, and has been for a long time,” he said, also describing how WHO is buffeted by contributing countries trying to control how money is spent. The organisation’s strengths lie in its ability to set standards and manage research; its weaknesses lie in operations and logistics. With this in mind, he warned that WHO should prepare for another wave of criticism in response to its ability to lift the vaccine.

“It will not be able to do this,” he said, adding that the organisation’s window of opportunity to create an operational entity has now passed.

Instead, he forecast that health institutions in regional blocs like the EU, ASEAN and ECOWAS could become the future focus of global health management.

Black Swan has become a cliché for any bad thing that surprises us. But the onset of COVID-19 was not a Black Swan according to the academic who invented the term and laments its misuse – Nassim Nicholas Taleb.  He saw it coming, as did Bill Gates and others, who warned of its impact in January.

Specifically Taleb wrote about the systemic risk of a health pandemic and its impact on markets in January in a note entitled “Systemic Risk of Pandemic via Novel Pathogens – Coronavirus”. In that he says: “clearly we are dealing with an extreme fat-tailed process…. fat tailed-processes have special attributes, making conventional risk-management approaches inadequate.”

Similarly Professor Cameron Hepburn,  Professor of Environmental Economics, and the director of the economics sustainability programme, at the University of Oxford –  not a finance guru, but a climate scientist – saw it coming. He positioned his own wealth and sold out of equities in January. Hepburn believes that climate science can teach finance a thing or two about risk.

So if the investment industry thought COVID-19 was a Black Swan what is missing? Are governance and decision making processes so antiquated and clunky; are egos – built on 10 years of bull markets – too blinding; does the industry lack the incentive to be innovative due to lack of disruption? One thing seems certain, if the finance industry thought that COVDI-19 was a Black Swan then maybe finance needs to evolve its risk modelling to be more forward looking in line with complex adaptive systems thinking.

Andrew Lo at MIT has been banging on about this for a long time, and is perhaps the best academic to cross disciplines – from finance – to address the issues. He says because markets are adaptive and change over time, using models from physics do not work, rather models from biology that look at complex adaptive systems are more appropriate.

Plenty of others, such as Hepburn, have come from the science background and are teaching the investment world how to open their minds. Importantly Hepburn talks about the need to recognise that both the finance and climate environments are complex adaptive systems, and that backward-looking analysis is not appropriate for adequate risk management.

“We need to get out of the old paradigms,” he says. “Even the concept of the Black Swan, doesn’t really help us to capture the fact these distributions are not bell shaped, or fat tailed or non-normal distributions. These are interactions between parts of the economy that are shifting the distribution altogether. So these things that are supposed to be a 1 in 10,000 event become the mean because you’ve shifted the distribution.”

Some in the finance industry have begun to look at new risk systems. Rick Bookstaber, who left his role as head of risk at the University of California endowment tin October, is focused on improving risk management for asset owners. Bookstaber, says an agent-based model is more appropriate than traditional models of risk management that use data from a static environment. A crisis is not static but stems from a series of events with many agents changing the environment often simultaneously.

The continued ignorance and inability of the finance industry to look beyond traditional models in assessing global risks is something that worries David Villa, executive director and chief investment officer of the State of Wisconsin Investment Board.

“Global health networks faced pandemics and potential pandemics in the past with Legionnaires disease, AIDS, bird flu, SARS, and MERS; but going into 2020, the market, press, and others acted as though nobody anticipated a COVID-type event. What bothers me is what other risks may exist in plain sight that the marketplace underestimates?” he says pointing to Professor Stephen Kotkin’s warning of a fomenting revolution on the far right and far left of the political arena.

“Climate change and ocean acidification is disregarded.  War ships on alert and in close proximity in disputed regions of the oceans add uncertainty.  In the background of these risks, the financial promises made to workers to partially replace income in retirement may need to be broken by governments that have failed to properly fund public pensions. The consequences of this myopia will not be felt next quarter or even next year but can easily become a crisis within the next two decades.”

Risk expert, Bob Litterman, puts it in simple terms. He says in managing portfolios investors are managing the future not the past, so using historical data to create a distribution of potential outcomes in the future is limited.

He advocates for the distinction between risk and uncertainty.

“Use the term uncertainty to make the distinction that the future is not something that comes out of a model, it is much more complicated. Models are relatively narrow in focus, but we have to be prepared for things that are not in the model,” he says. “Some of those things are known, such as climate change, we just don’t know the full dimensions of what that will imply.”

The disruption to the global economy due to the COVID-19 pandemic is an example of the potential devastating impact if uncertainty is not considered and managed.

In January, Taleb said: “It will cost something to reduce mobility on the short term, but to fail to do so will eventually cost everything – if not from this event, then one in the future…. policy and decision makers must act swiftly to avoid the fallacy that to have an appropriate respect for uncertainty in the face of possible irreversible catastrophe amounts to “paranoia”, or the converse a belief that nothing can be done.”

So while it may not be known what the next big disruptor to markets will be, it is agreed there will be disruption.

Investors need to work harder to open their minds, their outlook and their processes to allow forward-looking assessment of uncertainty to be a normal part of their asset allocation modelling.

 

If you are an observer of (or a participant in) ESG investing in the United States, you have been on a bit of a roller-coaster ride in recent years. Government regulators and politicians have favored it. And then they didn’t. And then they opposed it. And then they didn’t. With a new administration coming into office, we  can expect more change to come.

Interestingly, the likelihood of certain changes could well be determined by the outcomes of the two hugely important and competitive Senate runoff elections now underway in the state of Georgia. More on that below.

In the US, different governing bodies and regulators have differing levels of authority regarding investments generally, and ESG investing in particular. For example, the Securities and Exchange Commission (SEC) focuses on disclosure of risks and opportunities. Its calling card is insistence on accurate and factual disclosure. During the Trump administration, the SEC focused on two elements of disclosure that are relevant to ESG investing.

First, it focused on firms that advise asset managers and asset owners on proxy voting. A large pension plan or investment manager may have thousands of proxy votes to cast in a  year, so some outsource the actual voting, and others generally may follow the lead of the two or three most prominent proxy advisory firms. However, on the political right in the US, the perception had grown that the proxy advisors had gone too far to the left. As a result, the SEC imposed much stricter rules about proxy advisors’ disclosure, including about potential conflicts of interest.

Shortly thereafter, the SEC focused on impact, sustainable, and climate-focused investment offerings. The SEC made it clear that if an investment manager makes claims about these areas, that investment manager must be able to back up those assertions of impact and risk mitigation, etc. This was widely seen as an effort to hamstring ESG-related strategies.

The US Department of Labor (DOL), on the other hand, focuses (among its many duties) on pension plans governed by the Employee Retirement Income Security Act (ERISA). Just recently, the DOL issued a rule that can be interpreted to bar ERISA plans from investing on the basis of ESG principles at all.  The statutory language of ERISA makes it clear that an ERISA pension plan’s assets must be invested for the sole benefit of the participants. (One might argue that reducing climate change would, in fact, benefit the participants.) This new rule states very plainly that the investments must be based solely on the “pecuniary” interests of those recipients.

If your head is spinning, get ready for more. The Biden transition team’s website emphasises four priorities, and one of them is climate change. Indeed, President-elect Biden has already announced the appointment of former Senator John Kerry as climate “czar” (a White House-based appointment that does not require Senate confirmation) to drive and coordinate climate-related policy across the administration. So the US regulatory environment will surely become more favourable toward ESG investing. But how? And when? Unfortunately, the investor’s enemy – uncertainty – sits at the heart of any answer to this question.

The president ultimately has tremendous power to set regulatory policy at executive agencies (technically, the SEC is not an executive agency, but the president’s party will control it). He will need to appoint his cabinet, including a Secretary of the Department of Labor, and a chair of the SEC. These officials and their deputies and under secretaries and assistant secretaries will need to be confirmed by the senate. Don’t expect an Assistant Secretary of Labor (for the part of DOL that deals with ERISA) to be in office before June. If the SEC and the DOL want to issue new rules that overturn the three regulations described above, it can take a year or much longer to formulate and follow all the procedures for a new rule; but the administration has many other options available that are less onerous and take less time, such as private letter rulings and clear indications of non-enforcement. However, even those actions take time and leave uncertainty.

There is one other route that could possibly be taken that could change these regulations. The Congressional Review Act (CRA) allows congress to overturn rules within 60 legislative days of their effective dates. The effective dates of the DOL “pecuniary” rule and the two SEC regulations will leave congress time in the spring to overturn them.

So, remember the two senate races in Georgia? Well, control of the senate comes down to those two races. Republicans hold 50 seats; if Democrats win these two senate races, they will also hold 50 seats, and the Vice President, Kamala Harris, will be able to break any ties. Control of the senate is directly relevant to the ESG questions we have been discussing, because if both houses of congress are controlled by Democrats, they will be able to use the CRA to overturn all three rules, if they choose to do so. If Republicans control the senate, the CRA route is unavailable

One additional wrinkle: the CRA states that if congress overturns an agency’s rule, that agency  is permanently prohibited from adopting a “substantially similar” rule. The meaning of “substantially similar” has never been tested. One might reasonably (and rhetorically) ask, could it mean that a rule which required only consideration of “pecuniary” interest would somehow be substantially similar to one that allows the opposite? Seems unlikely, but this is Washington DC. That uncertainty might cause the new administration to avoid that potential pitfall and go to the trouble of entirely new rulemaking that will take a year or more. That action – new rulemaking – does not require senate action, so even if Democrats fail to win either Georgia senate seat, the Biden team will control the administrative rulemaking process.

Whatever route the new administration takes, there will surely be regulatory encouragement for increased ESG-related investing coming out of Washington, though it will probably take some time.

Charles E.F. Millard is a senior advisor for Amundi Asset Management; he is the former director of the U.S. Pension Benefit Guaranty Corporation.

Earlier this month the Australian superannuation fund, Rest, settled a case with one of its members, Mark McVeigh, who claimed the fund breached its duty by not properly considering the risks posed by climate change. Here, McVeigh’s lawyers write exclusively for Top1000funds.com and explain the significance of the case for pension funds around the globe.

Minimum trustee standards set by Rest climate litigation settlement

The recent settlement of a landmark legal action brought against the trustee of the Retail Employees Superannuation Trust (Rest) by 25-year-old member Mark McVeigh holds important lessons for pension fund trustees.

Mr McVeigh’s claim alleged that Rest had breached its statutory and equitable duties to members of the fund, including by failing to act with due care, skill and diligence, and in members’ best interests, by not properly considering the risks posed by climate change to the fund’s investments.

In a public statement, Rest acknowledged that climate change poses a material, direct and current financial risk to its superannuation fund. Rest has also committed to continue developing its management processes for dealing with the financial risks of climate change. Steps that Rest is taking include:

  • setting a goal to achieve a net zero carbon footprint by 2050;
  • measuring, monitoring and reporting outcomes on its climate related progress and actions in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD);
  • publicly disclosing the fund’s portfolio holdings;
  • incorporating climate scenario analysis into its investment strategy and asset allocation decision-making; and
  • advocating companies and governments to operate in line with the goals of the Paris Agreement.

While the eleventh-hour settlement means there will be no judicial determination, it is illustrative of a minimum standard of what a trustee must do when its actions questioned. The outcome sends a weighty signal to superannuation trustees in Australia as well as to pension funds around the world.

It is no longer appropriate (if it ever was) for funds to delegate the management of what Sir Nicholas Stern described in his 2007 review for the UK government as “the greatest market failure the world has ever seen”. Prudent trustees should implement top-down systems and processes to ensure that the financial risks of climate change are actively identified and managed, supported by rigorous reporting and disclosure regimes.

It is clear that the industry’s approach to climate change has evolved significantly, even since 2018 when Mr McVeigh commenced his hard-fought action against Rest.

The settlement follows years of signals from regulators and market players that it is incumbent upon funds to address the financial risks of climate change. In addition to the Stern review, in 2015 the Paris Agreement—arguably the biggest market signal in history—was reached. In early 2017, the Australian Prudential Regulation Authority noted that many of the financial risks posed by climate change “are foreseeable, material and actionable now”. Also in 2017, an influential opinion by leading barrister Noel Hutley SC emphasised the need for trustee directors to pay closer attention to climate change. Since then regulators and lawyers have only strengthened their resolve.

The trend towards better management of climate change risks was supported by the advent of sophisticated tools and procedural roadmaps—particularly the recommendations of the TCFD, which were published in final form in June 2017. Rest’s pledge to develop its processes for measuring, monitoring and reporting climate-related outcomes in line with the TCFD recommendations is representative that a prudent trustee will follow the TCFD’s advice.

Although Mr McVeigh’s legal action was commenced in Australia, the case has been followed closely by funds around the globe. It highlights both the increased scrutiny that funds face, and the tangible actions that they can take, when it comes to managing the risks posed by climate change.

It highlights the continuing divide between institutional investors attempting to keep their members’ money safe, and the Australian government, which at the time of writing, has so far refused to commit to a net zero by 2050 target or take meaningful steps to reduce emissions.

Funds are now fortified in advocating for better government policies, sensibly understanding that poor government policies represent a transition risk to investments. Those funds advocating for better outcomes are merely acting in members’ best financial interests.

Efforts by the Australian and US governments to marginalise climate change as a peripheral ESG issue beyond the remit of trustees represent a fundamental misunderstanding (and mischaracterisation) of climate change risk. No matter how much any government would like to divert funds’ focus away from climate change, the reality is that economies are already in transition and there is significant momentum to increase the pace of change. In such circumstances, climate change represents a material financial risk and funds are wholly justified in taking steps to manage it, including advocating for more proactive government policy.

The hard truth is that any remaining Board and Committee members who misunderstand climate risks and obstruct action on climate change will be shown the door.

As the dust settles, industry insiders tell us they expect that within 6 months most, if not all, Australian superannuation funds will have 2050 net zero targets. More funds will ramp up existing commitments, implementing a minimum 45% portfolio wide emissions reduction target by 2030 on 2010 levels in line with the umbrella organisation IGCC. Trustees are in a race to make shrewd long-term investments in renewables in addition to avoiding losses. The latter will be achieved, in part, by funds completing their divestment of coal companies and continuing to sell down gas and oil producers.

Policies of universal investors like Rest flow through to investee companies and fund managers. They all now have no real choice other than to align business plans and portfolios with ambitious climate pathways and rapid decarbonisation.

James Higgins, Ling McGregor and David Barnden are lawyers at Equity Generation Lawyers, the firm representing Mr McVeigh.

 

Asset owner collaboration is key to solving the deep inequity issues in investment management ownership and capital allocation.

Assessing, managing and changing diversity, equity and inclusion (DEI) is set to become the data issue of the 2020s, as investors turn their attention to the power they have to advocate for change in the companies they invest in, and the firms that manage their money.

“Mapping racism as a systemic risk means we should track this across the portfolio, but right now we don’t have the tools or the data,” says Henry Jones, chair and president of CalPERS.
“It is not unlike where we were on climate as a systemic risk, we didn’t have the information and had to build a data model and action plan with our partners. We need to do that with addressing racism.”

As an indication of how big the problem in in this industry, a 2019 study commissioned by the Knight Foundation found that asset management firms owned substantially or majority-owned by women or people of colour managed only 1.3 per cent of the industry’s total assets under management.

Last month David Swensen, chief investment officer of the Yale endowment wrote to all the fund’s investment managers highlighting the importance of diversity and asking managers to be accountable for the diversity within their ranks. He called on them to “join Yale in making a serious effort to improve diversity in the asset management industry”.

The ability to scientifically measure DEI is an important step in incorporating it into decision making, according to Jason Lamin founder of Lenox Park Solutions.

His firm, a Texas-based financial technology start-up, has developed statistically rigorous methodology to rank asset management industry participants on diversity data that it collects through its aggregation tools housed on its Roundtables Platform – which is somewhat of a matchmaking service for allocators of capital and asset management firms owned by women and people of colour.

This month, the Kresge Foundation and the John D. and Catherine T. MacArthur Foundation partnered with Lenox Park Solutions to survey and assess the racial and gender diversity makeup of the US asset management firms which invest $10.8 billion on their behalf. Those two foundations saw more power in collaborating, not only to increase their weight of assets but in a bid to make the process easier for managers and ensure results.

Other clients of Lenox Park Solutions include CalPERS, Texas Teachers and New York State Common.

“If there is one thing I think would really compel managers to be more transparent and respond at higher rates [on DEI issues] it will be some coordination on the asset owner side on how we ask these questions,” Lamin says, adding the best response results come from clients who ask questions with a tone of encouragement.

He says the industry needs to simplify or neutralise the weightiness of the subject and the burden that diversity has become in the industry.

“There needs to be an organic motivation to improve. The last thing we want is managers not wanting to participate in a survey on women and people of colour. We want to simplify the process of reporting and meet the market where it is.”

Benchmarking diversity

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. But 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.

Unfortunately, however, this is not a good news story. On average, in order to be in 90th percentile for DEI a manager only has to score 4.5 out of 10.

But it is a starting point, and after all as this industry knows only too well, what gets measured gets managed.

“Things need to work themselves out organically but we need industry protocols and standard measures, and the impact scoring is a way of measuring where you are and what that looks like relative to the industry,” Lamin says. “The industry is great because it is metric driven, and there’s a competitive element to it. If there’s a generally accepted way of measuring this, then it can become competitive in there’s a path on how to make it to the top quartile. All funds managers want to figure out ways to differentiate themselves and show they are in the top quartile, this is a different measure for that. Our hope is that firms come back to us and say how do we improve this? That is where the real conversations start.”

The team led by Lamin – who has had a long career in finance including as director in Merrill Lynch’s fixed income structured credit group in New York where he was instrumental to asset management due diligence – has a number of goals for improving the influence of their impact score. The Roundtable Platform currently has client portfolios of $121 billion, which all have impact scores. The first step would be to increase that AUM so more portfolios can be measured.

On a weighted average when the impact scores are applied to those portfolios, the DEI impact is 11.7 per cent. So the second goal would be to improve the weighted average so that a higher percentage of those portfolios have impact on DEI.

“How do we go from 11.7 to 12.5 per cent or 14 or 18 per cent? There are two ways: allocators can find managers with higher impact scores and allocate to them; or they can go to their existing managers and say you have an impact score of 2.7 we want you to increase that. Managers can do that by hiring, retaining and promoting women and people of colour.”

While Lamin says there aren’t many industries getting it right when it comes to DEI there are certain intricacies in asset management that contribute to the poor metrics.

“Any time there’s more complexity in anything there are places to hide. One of the first things we hear from an asset owner that is reluctant to improve diversity is they have a fiduciary responsibility to generate returns. Once that conversation gets tabled, you introduce lots of ways to defer decision making or intentionality around it. People say “let’s do a study to see if women who manage private equity get the same returns as men” that kind of thing just defers and defers. Our industry is good at using complexity to shield price discovery.”

Lamin says conditions do matter and while the finance industry’s heritage as a Wall Street Boys Club may have changed on the surface, those cultures still run deep.

“We see it in jobs, trades and deals assigned, it’s still a very clubby network of men. Look at the people assigned to be on boards of private equity companies, it’s all white men,” Lamin says. “The major risk to an asset management firm is if they are not building an inclusive organisation then they will miss out on the best talent.”