At the Alberta Investment Management Corp., diversity, equity and inclusion has catapulted up the priority list when it comes to investment strategy.
While DEI has long played a role in the decisions of the AIMCo and other institutional investors, says Alison Schneider, the organization’s vice-president of responsible investing, she credits the coronavirus pandemic for catalyzing its recent rise in prominence, thanks to the societal upheaval that came along with it.
“In the wake of the pandemic, there has been an increasing recognition that human capital is arguably our most valuable capital. The traditional male-dominated hierarchy is being replaced by more equitable models where you can be your authentic self in the workplace. . . . For us, DEI is not just a ‘nice-to-have.’ It’s a business imperative.”
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By the numbers
31% — The proportion of the Canadian population that identifies as a visible minority, according to Statistics Canada
624 — The number of directors at 521 companies that the BCI voted against in 2021 due to a lack of gender diversity on their boards
2.4% — The increase in revenue associated with a 1% increase in ethnocultural diversity across 7,900 Canadian workplaces, according to the Centre for International Governance Innovation
35% — How much more likely a public company in the top quartile for racial and ethnic diversity will outperform industry financial performance medians compared with one in the bottom quartile, according to a 2015 study by McKinsey & Co.
235 — The number of signatories to the Institutional Limited Partners Association’s diversity in action initiative as of April 2022, up from 46 when it was launched in December 2020
6.8% — The proportion of board seats occupied by visible minorities at corporations governed by the Canada Business Corporations Act, according to a 2021 report by Osler Hoskin & Harcourt LLP
In the fall of 2020, Schneider helped draft the Canadian Investor Statement on Diversity and Inclusion, an initiative coordinated by the Responsible Investment Association. Signatories, which included some of the largest pension plans and asset managers in the country, acknowledged the existence of systemic racism and various forms of discrimination, committing themselves to addressing these inequities within their organizations and across their portfolios.
If institutional investors or their investees still need to hear a business case for diversity, there’s certainly one to be made, says Fate Saghir, head of sustainability at Mackenzie Investments. “There are independent studies that have been able to tie DEI to better outcomes and to better innovation.”
For example, a 2015 McKinsey & Co. study of public companies in Canada, Latin America, the U.K. and the U.S. found those in the top quartile for racial and ethnic diversity were 35 per cent more likely than those in the bottom quartile to have financial returns above their national industry medians.
A couple of years later, a landmark report on Canadian workplaces by the Centre for International Governance Innovation concluded every one per cent rise in a company’s ethnocultural diversity correlated with a 2.4 per cent boost to revenue, as well as a 0.5 per cent increase in worker productivity.
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In addition to the RIA statement, Mackenzie Investments has also recently signed on to the BlackNorth Initiative, a campaign that seeks to improve employment opportunities for Black Canadians at signatory companies, as well as setting a goal for 3.5 per cent of executive and board roles to be occupied by Black leaders by 2025, matching the proportion of Canadians who identify as Black.
More than gender diversity
While these public declarations send a message to both an institutional investor’s own employees and the wider capital markets, their impact may be limited in the absence of strong data to monitor progress, according to Saghir, noting the sparsity of public statistics on ethnic and racial diversity have long made the social component of environmental, social and governance the poor cousin to its environmental and governance counterparts, on which company disclosures flow relatively freely in comparison.
What little data does exist isn’t generally held in high regard by institutional investors, according to the results of a 2021 report by Edelman Canada, which identified diversity and inclusion pledges as the ESG information about which investors harboured the most skepticism, with 71 per cent of respondents lacking full confidence in the accuracy of companies’ claimed progress against stated goals.
“It’s important to put pressure on each other, the industry and the public markets to better report,” says Saghir, noting a key part of the RIA statement expressed investors’ expectations that Canadian companies would enhance their annual public disclosures to include data about representation from Black, Indigenous and people of colour at every level of the organization.
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New DEI code for investment profession in Canada and the U.S
In March 2022, the CFA Institute launched a DEI code for the investment profession in Canada and the U.S. with the help of 16 organizations on both sides of the border.
The global non-profit organization said its voluntary code aims to generate better working environments and improved investment outcomes at signatory institutions by fostering their commitment to DEI measures that will open them up to wider viewpoints from the best talent.
Signatories to the code, developed over a two-year consultation and drafting process, must provide annual progress reports on the CFA’s six metrics-based principles, while Canadian organizations also commit to implementing the Truth and Reconciliation Commission’s Call to Action 92, which urged the business community to adopt the United Nations’ Declaration on the Rights of Indigenous Peoples as their reconciliation framework.
Fiera Capital Corp. is among the group of 16 inaugural signatories. “At Fiera Capital, diversity of thought and perspective fuels our ability to create innovative investment solutions and to efficiently allocate capital, fostering sustainable prosperity for all our stakeholders,” says Jean-Philippe Lemay, the firm’s global president and chief executive officer.
“We are taking an important leadership role on the path toward a more diverse and inclusive investment industry and we are committed to further driving positive and meaningful change within our organization and the communities we serve and support around the globe.”
“We definitely need mandatory reporting, so we can get some better data,” she adds. “It’s only with that kind of data that you can start making informed decisions and having constructive discussions when you’re meeting with asset managers or companies you are looking to allocate capital to.”
In Canada, the one area that bucks the diversity data trend is the reliable information available to investors on female representation at the board and executive levels of public companies, thanks to mandatory disclosure rules set by the Ontario Securities Commission in 2014.
Jennifer Coulson, senior managing director of ESG at the British Columbia Investment Management Corp., says this can be explained in part by the traditionally narrow view of diversity taken by pension plan sponsors and institutional investors. “Up until a couple of years ago, the focus was mainly on the gender aspect, but now it’s much more broad.”
At the AIMCo, Schneider says the racial justice outcry that followed the murder of George Floyd in 2020, as well as Canada’s recent reckoning with its residential school past, have forced investors to put a wider lens on DEI issues, even if the data is lagging. But, she adds, recent updates to the Canada Business Corporations Act have the potential to be “gamechanger.”
Read: Ontario Teachers’ focusing on DEI as key part of long-term vision
In 2020, organizations governed by the act were required to report for the first time on the representation of women, Indigenous peoples, persons with disabilities and members of visible minorities in board and senior management roles.
A 2021 report by Osler Hoskin & Harcourt LLP on the first sets of disclosed data has given investors a solid base to how the land lays. Looking at more than 2,200 board positions at 316 reporting companies, the law firm found 0.5 per cent were held by Indigenous peoples, 0.5 per cent by people with disabilities and 6.8 per cent by those belonging to visible minorities — each far below their representation in the Canadian population at large.
But Schneider warns the data is far from perfect, thanks to the limited number of companies registered under the act, spotty participation among those that are and the human rights issues raised when people are asked to self-disclose their racial or ethnic identity to their employers.
“It becomes more complex with respect to forms of diversity other than gender,” she says. “We need to be sensitive to the fact that not everyone wants to disclose.”
The impact of mandatory reporting
Still, Coulson says the investment community’s success at improving the gender balance at the top of Canadian public companies can set the template for boosting other forms of workplace diversity.
As chair of the investor group of the 30% Club Canada, she had a front row seat as female representation on the boards of S&P/TSX companies leapt — from 17 per cent in 2015 to 31 per cent in 2021 — after the introduction of the OSC’s mandatory disclosure requirements. Progress in the C-suite has moved a little more slowly, where female representation at the same firms has gone from 16 per cent to 20.5 per cent over the same period.
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The due diligence process by the BCI’s investment team includes a review of a company’s commitment to diversity and inclusion, followed up post-transaction with direct engagement on the matter. “We really like to use our leverage as an investor to work with our partners and portfolio companies to see those improvements over time,” says Coulson.
Expectations are enforced where necessary via proxy voting guidelines that set 30 per cent female representation on the board as its minimum standard for votes in favour of directors on the nominating and governance committees. In 2021, the BCI exercised 624 votes against sitting directors for falling short on gender diversity.
The most recent revision of the guidelines came too soon to incorporate such specific targets on racial or ethnic representation, but Coulson remains hopeful they could be developed before the next update in 2023. In the meantime, the BCI still voted against 12 directors at 11 companies for failures in this area. “We would look to expand our proxy voting guidelines once we felt really comfortable with the data.”
The importance of culture
• The societal upheaval brought on by the pandemic has boosted the prominence of DEI issues in investment decisions and prompted a series of commitments on the subject by institutional investors.
• Sparse and poor quality data concerning the diversity of Canadian companies may hamper the ability of pension funds to fully integrate DEI factors into their investment strategies, but progress is underway.
• Gender balance was traditionally the focus of investors’ DEI measures, but the definition has expanded in recent years to include representation for Black, Indigenous and people of colour, persons with disabilities and members of the LGBTQ2S+ community.
Jennifer Choi, managing director of industry affairs at the Institutional Limited Partners Association, says pure numbers should only be part of the conversation for investors that want to ensure their private equity partners share their commitment to DEI.
“You also have to look at the culture. It’s about recruitment, retention, promotion and engagement. A lot of general partners, too, are at the point now where they see this as a competitive advantage for recruiting talent in a really hot market.”
Read: How HOOPP is increasing DEI focus in culture, recruitment strategies
Several Canadian pensions have signed on to the ILPA’s diversity in action initiative since its launch in December 2020, with many joining the group’s quarterly roundtable meetings to share challenges and best practices. “We try to create a safe space for limited partners to come together and compare notes with their peers, but also maybe institutions that look a little bit different to them that might be doing innovative things,” says Choi.
In June 2021, the California Public Employees’ Retirement System became one of the first U.S. pension funds to hire a permanent chief DEI officer. Marlene Timberlake D’Adamo took on the newly created role after initially filling it on an interim basis alongside her work as the pension’s chief compliance officer.
“Prior to centralizing this function, things were happening in a lot of different spots,” she says. “This is a way to bring it all together and to show the work that is being done, so we can measure what we’re doing and ensure we’re seeing the outcomes and progress that we expect to see.”
Pension plan sponsors that are still in the early days of their efforts to better integrate DEI into their investment strategies should not be afraid to start small, she adds. “Things that will move the needle short term — the low-hanging fruit — builds credibility and you can get a few good wins, which is important. Then you can think about the things that will contribute meaningfully over the long term.
“This is long-term work. It is work that is necessary and needed, but . . . if it was just one thing that you could do, everyone would do it.”
Michael McKiernan is a freelance writer.