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This article appears in the June 2021 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

A year after global anti-racism protests, asset managers are facing pressure from investors to integrate racial issues into investment funds, but significant disclosure gaps remain.

Simon MacMahon, executive vice-president and head of ESG and corporate governance research with Sustainalytics in Toronto, said the firm has seen “greater intensity of interest” from its investor clients on social issues over the past year.

“We’ve certainly seen more emphasis on understanding the way in which companies are exposed to and managing their [diversity and inclusion] risk,” MacMahon said.

After George Floyd’s murder by Minneapolis police officer Derek Chauvin in May 2020 sparked protests around the world, many in the investing community predicted a greater focus on the social aspect of environmental, social and governance (ESG) investing. Some financial services firms made anti-racist statements and signed pledges to increase the representation of Black people, Indigenous peoples and people of colour in the firms’ workforces.

Kevin Thomas, CEO of the Shareholder Association for Research and Education (SHARE), said that most firms have followed through on those pledges to some extent.

“I think it could have gone one of two ways: either we just got a whole bunch of statements of solidarity last year and everyone said the right thing and then went about their regular business, or you saw people trying to put some meat on the bones and actually figure out what this means for investment practices,” Thomas said. “I’m happy to say, for the most part, it’s gone that second way.”

Michela Gregory, director of ESG services with Northwest & Ethical Investments LP in Toronto, said more companies are willing to discuss their methods for collecting their workforces’ diversity data. However, most disclosure focuses on the executive level rather than representation across the workforce.

“We may be able to get a sense of inclusion as we compare representation at different levels of the workforce,” Gregory said. “That’s also tied to turnover among underrepresented groups.”

But inclusion metrics often are different from firm to firm or not disclosed at all, making comparisons difficult. “We really lean into our engagement program as a way to help us counteract the struggles that come from inconsistent disclosure,” Gregory said.

MacMahon said Sustainalytics (which is owned by Chicago-based Morningstar Inc.) devotes “considerable resources” to understand companies’ diversity and anti-discrimination programs, but data on workforce demographics across most companies is still missing. “From our perspective, that data isn’t reported widely enough or consistently enough for us to track it,” he said. “But I think that’s changing.”

Regulation also is encouraging greater disclosure. As of Jan. 1, 2020, public companies incorporated under the Canada Business Corporations Act (CBCA) are required to disclose their diversity policies and the composition of their boards and senior management. This, Thomas said, will provide fund managers with more consistent data when comparing companies.

However, the CBCA measure is limited, as many large publicly traded companies are incorporated provincially, rather than under the CBCA. Thomas said SHARE has been lobbying provincial governments to adopt legislation that mimics the federal rules. In particular, he’s following up on the Ontario Capital Markets Modernization Taskforce’s recommendation to require issuers to set diversity targets.

The Canadian Securities Administrators have also launched consultations on “broader diversity” disclosures among corporate directors and executive officers.

In the meantime, asset managers are engaging with companies to get the required data. Lisa Hayles, an investment manager with Trillium Asset Management LLC, a socially responsible investing firm based in Boston, said her team sent a survey about racial equity strategies to 300 companies on Trillium’s buy list this year. The team ranked companies from 1–4 based on their responses, and gave zeros to the 20% of companies that didn’t reply. She and her team are now “working out how this can be used in our fundamental analysis going forward,” she said.

Shareholder proposals also could lead to better data. While activist investor showdowns with big oil companies have grabbed the headlines this proxy season, some proposals related to racial justice have also been successful. Shareholders of several large companies, including Wall Street giants, have called for racial audits. New York-based BlackRock Inc. is one of the few to agree to an audit.

“Many companies last summer made commitments around their products, services, makeup of their workforce, et cetera,” Hayles said. “The idea behind a racial equity audit is that a third party is brought in to assess what commitments you made, how much progress you made [and] how much further you have to go.”

Other shareholder proposals target companies’ operations. Trillium was concerned that Cleveland-based KeyBank’s overdraft fees were disproportionately affecting Black and Hispanic customers, so Trillium asked the bank to review its overdraft program through a racial justice lens. Parent company KeyCorp agreed to the review.

Hayles said this is a good example of how investors are looking more closely at the services, practices and diversity of companies.

Thomas said the combination of regulatory changes such as the CBCA rules and pressure from shareholder proposals will lead to better information for investors. “That’s going to make it more possible for those funds to integrate that data into how they score companies, and whether [those companies] get included in those funds and how they get weighted,” he said.

So far, there hasn’t been a glut of new products addressing racial justice, though. In January, Boston-based Natixis Investment Managers launched its AIA Racial Equity Investment Portfolios, which invest in companies that disclose diversity policies and exclude companies involved with predatory lending and for-profit prisons, among other criteria.

The NAACP Minority Empowerment ETF, launched in 2018 by Dallas-based Impact Shares, also excludes predatory lenders and examines diversity programs, supply chains and discrimination policies. The ETF, which tracks the Morningstar minority empowerment index, has US$28.7 million in assets under management and an annualized return of 18.4% since its inception.

Rolf Agather, head of research and product, indexes, with Morningstar in Seattle, said the company doesn’t have plans for other indexes specifically focused on racial issues. The challenge with such indexes, he said, is that filtering companies based on criteria such as racial diversity can make for a narrow index with insufficient diversification: “We always have to be mindful of what investment outcome [an index] produces.” So far, the NAACP ETF is the only one tracking the minority empowerment index.

Hayles said she doesn’t expect to see many thematic funds focused on racial equity. “Investors who care about any of those single issues care about a whole range of ESG issues,” she said, and thematic funds may be too niche.

A more likely outcome is greater demand for broad-based ESG funds that manage to incorporate better racial-equity screening. The Responsible Investment Association’s report on its 2020 investor survey, released in October, revealed that almost three in four investors somewhat or strongly agreed that they would like to invest in companies that support the advancement of women and diverse groups. Roughly the same proportion wanted their fund manager to engage with corporations to encourage more diversity in corporate leadership.