Taking the DE&I pulse in pensions

Why should pension schemes take account of DE&I in their investment strategies?

Sarah Smart: Diverse perspectives, skills and experiences on the trustee board support robust decision-making. Through effective DE&I, trustees are better equipped to weigh issues and consider aspects important to those impacted by their decisions – including in the design and implementation of the scheme’s investment strategies.

As researchers begin to recognise DE&I as a relevant factor in business performance, and that the same benefits of DE&I apply to the companies that schemes invest in, trustee boards are increasingly including DE&I in their stewardship policies. Trustees, through voting and engagement, are increasingly seeking to improve the DE&I practices of investee companies with the aim of seeking better returns for savers over the long term.

How would you assess the pensions industry’s current progress on DE&I in investment (for schemes, consultants and asset managers)?

Sarah Smart: Industry focus has been on gathering DE&I data, to understand how DE&I is applied in investment decision-making. Progress is being made, but there is still a long way to go.

While most trustees have made a start on evaluating their ESG beliefs and policies on voting and engagement, only a few have begun to dig deeper into how DE&I policies in investee companies can impact financial outcomes. Consultants are also starting to assess the DE&I policies of asset managers and how they are integrated into investment decisions, and beginning to highlight this to trustee boards.

However, progress depends in part on where some of these firms are based. The degree of materiality being placed on DE&I, and the level of data available, differ across different geographies.

Gavin Lewis: Mixed. Policies are making progress on diversity but progress still needs to be made on the day-to-day experience and inclusivity.

Positively, the issue is now firmly on the agenda, data collection has improved, policies and procedures have been put in place, some firms have even stated objectives, and evidence would point to increasing gender representation pre-pandemic and increased ethnic minority representation post George Floyd at junior levels.

However, gender representation has stalled post pandemic, and there has been very little progress in ethnic minority representation at mid to senior levels.

What could pension schemes and asset managers be doing better?

Sarah Smart: Trustees and asset managers should look to collaborate more closely to understand DE&I data, and the potential financial materiality of these factors in identifying risks and opportunities. This should be used to align future DE&I objectives and stewardship priorities, with a clear framework for measuring progress. Industry initiatives, such as the Diversity Project’s Asset Owner Diversity Charter, can provide a common framework for trustees and asset managers to work together.

Gavin Lewis: While data collection has improved there are still obstacles, which may indicate a trust deficit. Schemes should revisit commitments made, and either recommit or evolve them as a first step. They should also be focusing on culture, particularly middle levels of leadership, who are often responsible for implementing C-suite commitments.

Also, DE&I objectives should be aligned with business outcomes, rather than this being a solely HR issue.

What is going well – could you give an example of good practice?

Sarah Smart: Pension schemes now consider a broader range of ESG factors beyond environmental and climate-related risks. While a lot of attention has been paid to these aspects of the ‘E’ in ‘ESG’, there is now a growing recognition of the importance of social and governance factors as well (with DE&I being a good example of this). This shift in focus indicates industry is broadening its view of ESG to encompass social and governance considerations. By incorporating these aspects into their investment decision-making process, pension schemes are improving resilience to ESG risks and seeking opportunities to enhance value for savers over the longer term.

Gavin Lewis: Pay gap reporting for gender is a clear improvement, but also some firms are now publishing the same data for ethnic minorities – ahead of any legal requirement.

Also, the imposition of DE&I metrics in sales processes is a positive move.

What one change would you like to see schemes and/or asset managers make in 2024?

Sarah Smart: We have seen focus primarily centred on gender and diversity metrics, notably the representation of women on company boards. While this is a step forward, trustees and asset managers should consider diversity and inclusion across a wider range of areas – including cognitive diversity, age, ethnicity and socioeconomic background – in addition to gender. Incorporating these dimensions will allow trustees and asset managers to better assess risks and opportunities and shape their future stewardship priorities.

Gavin Lewis: There should be greater focus on the economic case for DE&I, as this moves the discussion from one based on values and beliefs to one based on economic rationale.

More on DE&I

Sarah Smart and Gavin Lewis will be continuing the DE&I debate in a panel session at the PLSA Investment Conference 2024: Driving DE&I: Why you have to get it right, Thursday 29 February, 9-10 am

More on DE&I at the Investment Conference: Social Factors: its time has come? Wednesday 28 February, 12.20-12.50 pm

Further reading on DE&I from the PLSA:

Stewardship and Voting Guidelines 2024

Look out for our new Social Factors case studies online after the Investment Conference.