Track Recap: ESG at Intellisight Part II

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By: Hilary Wiek, CFA, CAIA, Society Volunteer

After the morning breakfast presentation, chronicled in my previous Freezing Assets blog, the Intellisight Conference offered four panel discussions to further explore the current state of investing with an ESG perspective, how to approach with different asset classes, ESG data coming from companies and ratings groups, and issues investors and managers are still facing in this space.

The first panel, called “Risk & Opportunities across Asset Classes,” was moderated by Michael Corelli of Moody’s and included Jodi Neuman of Trillium Asset Management, Mike Pohlen of North Sky Capital, and Emily Robare of Gurtin Municipal Bond Management.  The main message from this group was that ESG investing has moved well beyond the screening of stock universes to remove morally objectionable companies from a portfolio.  The panelists discussed how they have folded ESG thinking into the investment process across all asset classes.    

The rationale for many investors to consider environmental, social, and governance factors boils down largely to risk and opportunity, principles that even those with little interest in saving the world generally find important.  Bond rating agencies and bond purchasers are thrilled to have new metrics to incorporate into their analysis of a bond’s risk.  Equity managers are also looking for companies with positive attributes that will make them more sustainable businesses in the future.  By embracing companies that treat their employees well, have a high-functioning governance structure, and avoid misuse of resources, investors can focus in on a subset of companies more likely to do better in the future than their peers.

One example:  when evaluating insurance companies, ESG factors, particularly climate risks, have become a very important lens that had previously been difficult to assess.  With natural disasters coming more frequently and in greater magnitude (2018 had the 4th most natural disasters ever recorded; 2018 was the 8th consecutive year with 8 or more natural disasters costing more than $1 billion; learn more here, it is important to factor in the likelihood of such events when evaluating the health of an insurance business.  Some insurers are more heavily geared to geographies more likely to face bigger losses, such as in Florida (hurricanes) and California (fires).  In January 2019, Pacific Gas & Electric had a wildfire-related bankruptcy, a loss investors may have avoided if they properly assessed the fire risks facing California. 

Moody’s is continuing to develop work around ESG factors in its ratings methodology.  They assess 84 global industries representing $75 trillion in rated debt.  They have identified 51 sectors with $62 trillion in debt that are considered low risk; some of these may even possibly benefit from emerging environmental trends. An example of the latter is the construction industry benefiting from repair and reconstruction after natural disasters and investments being made into the building of energy efficient systems. 

While some would avoid entire sectors due to them being “dirty” or some other objectionable rationale, many equity investors utilizing ESG principles believe that the magnitude of the risks are specific to each company, so there is potential for a company in a dirty industry to outshine the competition, leading to better stock performance.  In addition, many companies in carbon-heavy sectors are developing technologies to more efficiently use fossil fuels or even to swap out such fuels into cleaner energies, becoming a solutions provider to the energy transition instead of a victim of the trend.   

Even in municipal bond analysis, ESG considerations can play a part.  Climate risks are often very local and what are municipal bonds but plays on the ability of a local economy to continue to pay back investors?  While it is likely that coastal areas around the U.S. will be impacted by heavier rains and coastal erosion, some communities have a broad and wealthy enough population to rebuild while others will lose population to more sustainable areas.  It is likely that residents of Malibu, CA, would have the resources to rebuild after landslides, but New Orleans, LA, could suffer a permanent decline in its tax base.  This translates to a bond issue from Malibu being a better credit than one from New Orleans.  One difficulty, however, can be in modeling the timing.  Even in an area likely to suffer from rising oceans, a five-year credit may encounter no difficulties, but the longer the time frame, the more likely a significant event could hit a locale. 

ESG in the private equity landscape is usually focused on solutions to the environmental risks facing so many locales.  They seek out portfolio companies with clean technologies that can profit from shifts in attitudes toward fossil fuels and climate change.  Even when you find a clean technology, however, ESG risks must be considered.  If a hydro-electric project faces a multi-year drought, how would the project do with decreased output for a sustained period?   

The biggest issue for analysts hoping to assess ESG risks is the availability of reliable data.  While companies have just recently been getting better at reporting things like carbon usage, other risks are only reported sporadically and there is a danger that some would penalize a company that is being forthcoming in reporting its ESG risks but then not penalizing companies not reporting because there is nothing for analysts to go on.  There is very little ESG data reported to a muni bond investor hoping to assess environmental risks to an area, though some county by county government data can be useful in extrapolating a location’s risks.  Later panels discussed the state of ESG data in the world today.

The next panel, titled “Who’s Who in ESG and Impact,” was moderated by Chris McKnett of Wells Fargo Asset Management and included Mac Ryerse of Columbia Threadneedle Investments and Michael Young of US SIF:  the Forum for Sustainable and Responsible Investment.  Ryerse has done a lot of work for the Sustainability Accounting Standards Board (SASB), who is working to standardize the company reporting of financially material impacts of sustainability on their businesses.  In other words, SASB is working to address the data problem raised by the prior panel.

The topic of ESG and sustainability, and whatever other terminology one might prefer, is fast-moving and still being debated heavily.  That said, there is a lot of talk and the category cannot be ignored, even if the AUM are still modest. 

One news item of note from the session, Young recently worked with the College for Financial Planning to create the first professional designation for sustainable investment. 

US SIF (social investment forum) has long been a resource for understanding the state of play in the sustainable investment space.  They continue to work to drive awareness and adoption of sustainable investment principles.  SASB has taken on the burden of working with industry participants, including public companies themselves, to establish industry-specific frameworks for the reporting of financially material information that would not typically be required by GAAP standards of financial reporting.

In 2018, US SIF published its biennial Report on US Sustainable, Responsible, and Impact Investment Trends.  The report can be found here.  From the website: 

“The 2018 Trends Report presents data from new survey questions on the asset class allocation of survey recipients’ ESG assets, their percentage of ESG assets in passive strategies, and their support for the UN Sustainable Development Goals. The Trends Report also focuses on the extent to which ERISA-governed pension plans added ESG funds after the Department of Labor’s 2015 guidance acknowledging that “environmental, social, and governance issues may have a direct relationship to the economic value of the plan’s investment.””

When it comes to the adoption of ESG principles in investment management, there appears to be a hockey stick upturn starting in 2012.  Readers should be aware of issues with the data, however.  There are very few new mandates in the public equity space these days as money is being pulled from active management and placed into passive ETFs and index funds.  There has, however, been a surge in mandates seeking active managers integrating ESG principles into their investment process.  Investment managers have realized that selecting Yes to questions in databases about ESG will open up their products to searches.  Asset managers may change nothing about their process, but reason that since they’ve always considered corporate governance in their investment process, they can say yes and be considered for a prospective mandate.  This “greenwashing” can inflate the amount of true ESG offerings available and can make it more difficult for asset owners to identify the right partners for these new mandates.” 

Being a signatory to the United Nations Principles for Responsible Investment (UN PRI), is a phrase heard from industry participants as evidence of a commitment to invest with some sort of ethical guidelines.  That said, any mechanisms to hold people’s feet to the fire in showing their commitment to responsible investing are rather toothless. 

UN PRI has championed 17 SDGs or Sustainable Development Goals, which include such areas for global improvement as Zero Hunger, Quality Education, Gender Equality, Decent Work and Economic Growth, and Responsible Consumption and Production.  1,700 asset managers and investment providers are signatories to what the speakers called a framework for a conversation.  The goals do not all neatly map out to easy financial choices, but the idea is that if investment dollars were to target some of these global issues, the world could be improved. 

SASB is connecting businesses and investors on the financial impact of sustainability.  They have brought some shape and focus to the marketplace, helping the area grow and become more robust.  In a world where corporate valuations have become more and more dependent on goodwill and other intangible assets, analysts need to find ways to evaluate the sustainability of those assets.  ESG factors can provide forward-looking insights into a company’s performance and risk. 

There has been an explosion of data.  In 2011, 20% of S&P 500 companies produced a corporate responsibility report.  In 2018, it was 86%.  That said, while companies surveyed think they are doing very well in their responsibility reporting, investors still feel there is a lot of room for improvement.  The reports are inconsistent to each other, making them difficult to compare.  The data points used are not governed by any accounting rules, leaving analysts unsure as to what is being reported and how reliable the metrics are.  Analysts wanted data they can reliably build into models. 

SASB stepped into the gulf as a standards-setting board taking an evidence-based approach to provide standards for issuers (of both stocks and bonds) to use in disclosing their ESG efforts.  In order for something to be considered for a standard, there must be:  1) evidence of investor interest and 2) evidence of financial impact.  This has led to ESG factors reasonably likely to affect the financial condition or operating performance of a company.  2,900 people worked on this standards-setting effort; a third each from: asset managers, asset owners, and academics. 

The full standards (broken out into 77 distinct industries, as not every metric pertains to every company) were released in November 2018 and can be found at the SASB website here.  While these are called standards, adoption is still strictly voluntary.  The hope is that the investment community demanding to have the data will pressure the companies to provide it.  Major accounting firms are starting practices to verify the reports that are published.  Only a couple of dozen companies have implemented the SASB standards thus far; JetBlue was the first. 

The third panel of the ESG track of the Intellisight conference was titled “Clarity from the Chaos?” and was moderated by Eric White of Cogent Consulting.  The panelists were Matt Sheldon, CFA of KBI and James Spidle, CFA of Breckinridge.  For context, Cogent is a Minneapolis-based investment consulting firm working with mission-driven investors on impact investing around the region.  KBI is an Irish-based asset manager and Sheldon is a portfolio manager on the firm’s water strategy.  Breckinridge is an investment grade fixed income manager that fully integrates ESG into its investment process.

The chaos of the panel’s title is largely the confusion clients and other industry participants feel about what everything means.  As a fixed income manager, Breckinridge had to explain that ESG wasn’t just a concept important to equity managers.  They had to make the case that as fixed income has set maturities sometimes far into the future, considering ESG risks is only prudent in evaluating a potential credit investment. 

One point KBI feels is important for investors to know is that having an ESG lens does not mean that they cannot invest in “bad” ESG companies.  If the risks are priced in, the issue may be a good investment.  But they feel the company can get to a more appropriate valuation if they are more inclusive in the risks they consider.  In addition, they want companies to be better and will engage with management teams to share views on how they feel the companies could improve their ESG practices. 

Another issue in the chaos of ESG investing is that not every client prioritizes the same set of values.  So while KBI may look for companies that are solving water problems, an investor might protest that a company is solving the problem of accessing water in order to facilitate fracking.  Breckinridge largely manages customized separate accounts, allowing every client to have its own values overlay.  No companies are pristine, but they have the information to be able to tilt a client’s portfolio to the areas they care about.

Another point of confusion is between investors and companies.  The investors serious about ESG are often attempting to engage with issuers on various ESG topics, but each investor may have a different set of priorities in terms of what they want to see reported.  Overall, everyone wants better disclosure and transparency, but what form that will take is still evolving.

Asset managers have been struggling with how to report their ESG efforts to clients.  They’d love a generic report to supply, but each client has a different set of interests on which they want to see results.  Reporting is definitely still evolving.

The idea that you can do well while doing good is another point that is still not fully accepted among investors.  More and more asset managers believe they can integrate ESG thinking into their investment process without sacrificing returns, but discussions are ongoing with clients as to how realistic it is to invest to a narrow set of principles and still expect market or better returns.  Given that many believe integrating ESG into the investment process will decrease risks, some advocate that at the very least you can achieve better risk-adjusted returns with this approach.

What it means to incorporate ESG into the investment process can vary widely.  There are so many different approaches to integrating ESG and investors must do the work to look under the hood and evaluate the veracity of the ESG claims, given the incidence of “greenwashing” (see above) in the industry.  Just falling back on an ESG rating by a service provider will not give the full picture, particularly as many companies who are rated have never had a conversation with one of the providers.  Differentiated ESG integration will have the asset manager asking its own questions and coming to its own conclusions on a company’s ESG record. 

An interesting point made by Sheldon:  the best rated ESG companies are often trading at high valuations.  The worst are at low valuations.  So a good portfolio from a valuation perspective (perhaps banking on improvement through engagement with the low-rated companies) may have a low score from the ESG service providers like MSCI and Sustainalytics.  

The main way to avoid the confusion and chaos in the ESG landscape is to start with very basic discussions with clients to ensure everyone is speaking the same language.  Do not assume that when someone uses the word sustainable, for example, that it means the same thing to all parties.  For that word alone, some think about it in terms of energy sustainability, while other think about how sustainable a competitive advantage is for a company; two very different concepts.  So ask questions, form a common foundation, and the end result will be much closer to the vision of what the investor is truly looking for.

The final panel in the Intellisight ESG track on August 13 was called “Demystifying ESG Data, Ratings and Research” and was moderated by Chris Eckhardt of Columbia Threadneedle Investments.  Geeta Aiyer of Boston Common Asset Management, Trevor David, CFA of Sustainalytics, and Jennifer Sireklove, CFA of Parametric were the panelists.

Columbia Threadneedle has a large sum of assets in ESG-related quant strategies.  Boston Common is an ESG boutique incorporating ESG at every stage of what they do.  Sustainalytics is a service provider offering ESG ratings on public securities issuers.  Parametric is a quant manager with no individual securities analysis, but they are providing custom ESG integration for clients upon request.  They have been thinking about active ownership practices with an ESG lens, however – voting proxies and the like.

ESG data allows you to do ESG research at scale.  Columbia trades in 6,500 publicly traded companies and does not have time to trade them all.  They use 3rd party ratings/research as a starting point.  ESG data, now coming from many public companies, can be critical to ensuring a portfolio is meeting client expectations.

Sustainalytics provides company-level risk ratings meant to get at a company’s exposure to ESG risks.  The firm starts with which factors are material at the subindustry level.  They speak with companies and leverage Sustainalytics’ analysts’ expertise for this.  They will make adjustments at the company level related to geography and other company-related idiosyncrasies. 

A question for Sustainalytics was how they account for the fact that companies eagerly report good news, but are hesitant to provide data that will make them look bad.  Sustainalytics will screen news sources daily and pull relevant incidents in that analysts will assess in the context of what they know about the company already. 

Other areas Sustainalytics is developing:  a carbon risk rating; country-level ratings; municipal bond ratings, including looking at the proceeds and how they are used.  They also have product information at the company level – not just identifying “sinful” products, but also if the company is deriving income from things like affordable housing or sustainable transportation systems.

Parametric began having conversations with clients about ESG in 2018, but found that many of the client’s aims do not map well to public equities.  Growth in affordable housing is a good example, as there are few public stocks that will impact this objective.  Things that can work in public equities is controlling the types of companies you own and changing the way companies behave.  Companies will be influenced more by owners of the company, so sometimes you need to own shares of a company whose practices you don’t like in order to effect change. 

How to benchmark custom ESG portfolios?  Most asset managers leave it up to the clients, but will have conversations about tracking error expectations, particularly if the client decides that a standard benchmark is the index of choice.  Too many client-driven restrictions will lead to wide dispersion from a benchmark, but the ESG mandate being fulfilled may be more important than a tight performance profile.

Boston Common has an independent investment team as well as an ESG team.  The output from the ESG team is a source of information to the investment team – a corroborating source from a different vantage point.  Ideas can come from both sides and have to be vetted by the other.  The team feels that it would be irresponsible to throw away any relevant data; more and more is becoming available for ESG factors.  That said, in markets that are less efficient for financial data (emerging markets, small caps), there is less ESG data available, as well. 

In terms of engagement, while some ESG risks are systematic and cannot be diversified away, investors can try to steer companies away from the iceberg.  One needs to look beyond the typical dirty industries to companies that on the surface seem less likely to be impacted by ESG risks.  But if a bank is making loans to oil producers or coastal developers and is not itself asking relevant ESG questions of its customers, it could face losses that could have been avoided.

Reporting is still a work in progress for the industry.  Some are using the UN PRI Sustainable Development Goals, others tailor reports to client objectives, and still others are attempting to come up with standard reports that can meet the needs of most of their clients.  Many asset managers are in continual discussions with clients on how best to meet their needs. 

Are you interested in helping plan the 2020 ESG Track at Intellisight? E-mail Amanda at events@cfamn.org.

Track Recap: ESG at Intellisight

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By: Hilary Wiek, CFA, CAIA, Society Volunteer

J. Drake Hamilton
Science Policy Director, Fresh Energy

The ESG track at the Intellisight Conference on August 13 was a terrific guided tour through the issues and solutions currently in development and practice in the investment community. While it has become a massive topic in some industry circles, some may still be unaware that ESG stands for Environmental, Social, and Governance. It is somewhat related to the SRI (Socially Responsible Investing) methodology that grew to prominence in the 1990s, where individual investment programs applied values (faith-based or otherwise) to screen out certain investments.

ESG has gained more widespread acceptance globally than did SRI because of the risk-avoidance approach it entails for many. While certain “sin stocks” (for example, gambling, alcohol, tobacco) may offend some, there may be nothing inherently wrong with the investments. On the other hand, if a company is polluting, treating its workers poorly, and operating without appropriate board oversight, there are legal, competitive, and agency risks that prudent investors should seek to avoid.

The Intellisight ESG track started at breakfast with a talk by J. Drake Hamilton of Fresh Energy, a non-profit climate and energy think tank based in St. Paul. She is a Science Policy Director, so spoke to us of science-based evidence of damage being done to the planet and the policy work they are doing to combat very real problems. Fresh Energy seeks to shape and drive realistic, visionary energy policies that benefit all.

Some facts Hamilton presented, particularly the ones that hit close to home (I encourage you to go to fresh-energy.org for much more):

  • Even with strong measures by the world’s largest polluters, consulting firm Wood Mackenzie said in its August 2019 Energy Transition Outlook that fossil fuels will still contribute about 85% of the world’s energy supply in 2040, down only 5% from today. Much investment is needed to transition our dependence on fossil fuels to sources of energy that will have a marked impact on global warming.
  • Minnesota has warmed 3-4 degrees in the past 30 years. By 2050, the temperatures are expected to warm an additional 5 degrees Fahrenheit. A warming climate leads to amplified extreme weather. The “100-year events” are now happening much more often. More of the rain will come in intense downfalls, which cause extreme floods and damage agricultural productivity.
  • Wildlife in Minnesota is being impacted. Expect a rapidly declining population of moose (replaced by deer), loons, and Canada lynx (replaced by bobcats). The state’s pines, firs, spruce, and tamaracks are facing issues, as well, as some are being harmed by an increase in pests and too early springs.
  • For humans, Minnesota mosquito season has extended from 74 days a year to 108. Lyme disease is on the rise. Pollen production is increasing. Heat waves are coming with more frequency and more extremity. Children under 5, adults over 64, and people living in poverty are most at risk.
  • Globally, July 2019 was the hottest month ever recorded.

Current policy issues:

  • People will not stay and die where the environment won’t support them – they will migrate. This will lead to places that can support life being inundated with climate immigrants.
  • Both China and India are outperforming their national commitments to the 2015 Paris Agreement. The U.S. is not performing on pace; where the federal government has not taken action, the states have been assuming leadership on the issue, though it is not enough to move the dial as much as is needed.
  • Minnesota’s House of Representatives passed a bill in 2019 to establish a 100% clean energy target for electric utilities with a deadline for completion of 2050. This effort is supported by the largest Minnesota utility, Xcel, companies, citizens and city governments within the state. Nearly half of Minnesota’s electricity production is already free of carbon.
  • All levels of government can help in fighting an increase in global temperature. Beyond mandates and incentives to businesses and homes to convert to electricity, cities and states are working to transition to electric vehicles for their fleet vehicles. In the Twin Cities, all new buses purchased for Metro Transit will be electric starting in 2022. By 2040, the entire fleet will be electric.

What sort of information should investors have?

  • Investment is needed particularly in batteries – wind and solar are variable, not available every minute of every day, so finding solutions to the storage of power is essential. By moving passenger vehicles from today’s less than one half of one percent to one third of the global fleet in 2040, immense scale will be added to the battery manufacturing sector, which should lead to innovation and cost reduction.
  • Wind and solar are often produced in more rural areas where renewable energy potential is much greater. But electricity does not currently travel long distances without significant losses. Transmission that moves the clean electrons from where they are sourced to population centers is needed. This improvement to our national infrastructure is being called the Power Superhighway.
  • The clean energy transition – taking carbon out of the economy, be it in skyscrapers, transportation, or homes – is being fueled by lower cost technologies replacing fossil fuel uses; this will hurt some and help others from an investment perspective. Investors need to be aware of the risks that this transition may have on investments, be they opportunities or threats.
  • Make the business case: companies, cities, industries, and citizens need to be shown how attractive it is to live in a world where temperatures only rise by 1.5 to 2 degrees C by 2030 rather than 3 degrees C, which is where we are currently trending.
  • 60,000 jobs have been created in Minnesota in clean energy. 40% of those were in rural parts of the state. This field is growing 4-5% faster than other jobs. Energy efficiency is responsible for 46,191 of these jobs, while another 4,917 are in solar. Two Minnesota companies, Blattner and Mortenson, installed 70% of all solar and wind projects in North America in the last 10 years.
  • Wind is our least cost clean energy resource, though solar will soon be in that category. Solar panels, per a VP of Mortenson, have dropped from 47 cents per watt to 35 cents in just 10 months, and the costs keep dropping.
  • Many landowners receive higher profits from renewable energy lease payments than from some farm fields, so installing clean energy generation provides more income diversity for farmers. Improved economics on land increases land values and property taxes for local communities.
  • Aveda was the first Minnesota company to go to 100% wind energy. It is building its own solar array in Blaine, MN. Aveda, General Mills, Target, Tennant, Cargill, Best Buy, and Uponor have all shared their clean energy goals – and economic rationale – with Minnesota legislators.
  • Xcel Energy announced this year that in 2028 and 2030 its last two coal plants will be shuttered. And it will save its customers $200 million by doing it.
  • Goldman Sachs this year formed the Sustainable Finance Group to deliver sustainable growth solutions to clients. They see this as a big growth initiative for its business, not a do-good venture.
  • Shareholder actions and divestment: Typically, you have to own shares of bad actors to get them to listen, but if you find they are not listening and are actively operating in an irresponsible manner, investors may need to divest to get their attention.
  • Increased options to invest: Morningstar says that $8.9 billion in net inflows went to funds with an ESG mandate in the first six months of 2019. Green bonds will have expanded to $250 billion by the end of 2019.

In the next blog, I will report on the highlights of the four ESG-related panels that followed Hamilton’s breakfast presentation.

Event Recap (part 3): Diversity & Inclusion: Bridging the Gap in the Investment Industry

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By: Hilary Wiek, CFA, CAIA, Society Volunteer

In the first two segments of my reporting on the Diversity and Inclusion event of June 5, I discussed the misconceptions about the event and some of the high-level topics discussed by our esteemed speakers.  In this final installment, I will outline research and resources on the topic that may 1) help convince some people that there is supportive evidence to justify diversify and inclusion efforts in the workplace and 2) provide guidance on solving some of the problems outlined previously. As a recap of the prior blog post, one broad topic area was having productive conversations about diversity and inclusion, a second was hiring a diverse workforce, and a third was retaining a diverse workforce.

Speakers at the CFA Minnesota event stated that bringing evidence-based findings to discussions about diversity and inclusion has really helped to advance the topic, in some cases converting individuals who were skeptical there even is a problem. A number of studies have found what many who have given this topic any thought would have suspected from anecdotal evidence, but having research to back up the suspicions has been powerful. 

For data and evidence, the University of Chicago, in partnership with private sector support, has dedicated resources to study this topic under the moniker The Science of Diversity and Inclusion (SODI). Their website states that the initiative “brings together leading researchers and organizations to identify, accelerate, and apply new evidence-based approaches to advance diversity, inclusivity, and belonging in our places of work and learning.” Profiles of the affiliated researchers, their areas of study, and a summary of their findings can be found here.

One of the more interesting studies mentioned at the CFA event was from a team out of Columbia University (Sheen S. Levine, Evan P. Apfelbaum, Mark Bernard, Valerie L. Bartelt, Edward J. Zajac, and David Stark) about homogenous and heterogenous investment teams (called “experimental markets” in the study).  A link to the work, entitled Ethnic Diversity Deflates Price Bubbles,” can be found here.  From the abstract (the italics are mine at the end): 

“Markets are central to modern society, so their failures can be devastating. Here, we examine a prominent failure: price bubbles. Bubbles emerge when traders err collectively in pricing, causing misfit between market prices and the true values of assets. The causes of such collective errors remain elusive. We propose that bubbles are affected by ethnic homogeneity in the market and can be thwarted by diversity. In homogenous markets, traders place undue confidence in the decisions of others. Less likely to scrutinize others’ decisions, traders are more likely to accept prices that deviate from true values. To test this, we constructed experimental markets in Southeast Asia and North America, where participants traded stocks to earn money. We randomly assigned participants to ethnically homogeneous or diverse markets. We find a marked difference: Across markets and locations, market prices fit true values 58% better in diverse markets. The effect is similar across sites, despite sizeable differences in culture and ethnic composition. Specifically, in homogenous markets, overpricing is higher as traders are more likely to accept speculative prices. Their pricing errors are more correlated than in diverse markets. In addition, when bubbles burst, homogenous markets crash more severely. The findings suggest that price bubbles arise not only from individual errors or financial conditions, but also from the social context of decision making. The evidence may inform public discussion on ethnic diversity: it may be beneficial not only for providing variety in perspectives and skills, but also because diversity facilitates friction that enhances deliberation and upends conformity.”

The CFA Institute has been spending time on diversity and inclusion as well, conducting surveys and hosting workshops with industry participants to better assess the state of diversity and inclusion in the industry, provide public data from these efforts, and come up with ideas on how to address the problems. Here is a link to the CFA Institute’s published work derived from its efforts, “Driving Change:  Diversity & Inclusion in Investment Management,” which was distributed at the CFAMN event. 

Once evidence has been supplied and hopefully accepted, the next question is what can be done about it?  One of the resources mentioned several times at the CFA event was the book What Works, by Iris Bohnet, who is affiliated with the SODI efforts outlined above. The SODI site summarizes the book as a resource “to hand decision-makers the tools they need to move the needle in classrooms and boardrooms, in hiring and promotion, benefiting businesses, governments, and the lives of millions.” A short video summarizes Bohnet’s work here.  She also authored the following articles:

The pipeline of diverse candidates was another of the significant issues identified at the CFAMN event – even if a firm wants to hire from a diverse talent pool, there is often a dearth of qualified candidates fitting diverse profiles. Several organizations were mentioned at the event that are attempting to reach women and minorities earlier in their education to let them know a) that the investment field could be an attractive career option and b) what they need to do in order to prepare oneself for a career in the field (including education and internships).

One organization called out at the event was Girls Who Invest (GWI), which got its start in 2015.  Each summer since 2016, GWI has held a four-week summer educational program for college women, after which each participant works in a six-week paid internship. The stated goal of the organization is to get 30% of the world’s investable capital managed by women by 2030. A New York Times article linked on the website states that only 7% of investment managers in the $15 trillion mutual fund industry are women.  If you are looking for a way to help solve the diversity problem in our industry, GWI seeks volunteers to mentor students, speak at events, and teach courses during its college summer intensive learning program. They also seek financial partners in the investment management industry to provide mentors and host interns.

Another organization is Invest In Girls. Per the website: “Invest In Girls works with schools, community organizations, corporations and foundations to provide financial literacy programming to young girls.” This group’s programs seek to educate 10th, 11th, and 12th grade girls in workshops before they get to college, allowing them to learn about personal finance and careers in finance while there is still time to formulate a higher education plan. This organization is seeking volunteers to make short videos for its Role Model Exchange outlined here.

In 2013, financial services firms in Chicago came together with The Chicago Community Trust to form the Financial Services Pipeline Initiative. The key goals of this group are to 1) increase the representation of Latinos and African-Americans, at all levels, within the Chicago area financial services industry and 2) improve the overall cultural competency within the Chicago area financial services industry. While volunteer activities may be out of reach for the CFAMN membership, the website has interesting data and may provide ideas for how to bring some of this group’s activities back to our region.

Other resources/research not discussed at the event, but suggested by the speakers:

In closing, did you know this event was planned and organized by a CFAMN volunteer? Thanks again to Amy Jensen, CFA, Investment Director at Northwest Area Foundation who put together this enriching program. Do you have a great idea to share or a project you feel passionate about? E-mail society staff and they’ll help you make it happen!

Event Recap (part 2): Diversity & Inclusion: Bridging the Gap in the Investment Industry

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By: Hilary Wiek, CFA, CAIA, Society Volunteer

In my last blog post, I provided an introduction to the excellent program CFA Society Minnesota had in June on Diversity and Inclusion. In this post, I’ll outline some of the key topic areas from the event, drawing upon talks by BlackRock’s Jonathan McBride, Wells Fargo’s Leyla Kassem, CFA, discussions at the tables and then shared with the room, and two panel discussions – one with women working in their organizations on diversity and inclusion issues and the other with women discussing their paths to the leadership positions they now hold. A third post will provide information about where one can read more about or do more to advance this important topic. So here are some thoughts on the topics discussed on June 5:

1.) To have productive conversations about diversity and inclusion:

Assume positive intent. Our speakers challenged us to have an important and uncomfortable conversation. You probably have noticed that you will allow some people to tease you quite mercilessly and you take no offense. Or if you do take offense, you find yourself excusing them because you know that they meant nothing by it. Yet if a stranger made the same joke, your reaction might be quite different. This is one indicator of unconscious biases that we all harbor.

When hoping to have a constructive conversation on the topic of diversity and inclusion, it is good to do what you can to be aware of your biases, realize that the other people have their own biases, and make an effort to act with the assumption that you both have positive intent, regardless of what comes out of your mouths. By doing this, hopefully everyone will give the benefit of the doubt when it comes to word choice and will truly hear the perspectives being expressed.

It is important to note that unconscious bias training will not eliminate biases. The hope is to mitigate biases and have people learn to hire or act around the biases.

2.) Hiring a diverse workforce in the investment industry:

One major problem to getting to a more diverse workforce: pipeline. Many people at the event mentioned that when trying to hire people for their open positions, the applicants were overwhelmingly white males. One leader had assumed that her company was just doing a poor job recruiting, that the diverse talent was out there, but she came to see that many women and people of color opt out of the business because of things they have heard about the lifestyle and culture or they do not even realize what investment roles entail when they are in the process of designing their educational path. The next blog post will list a few real-world programs working to solve the problem of attracting diverse individuals to the industry.

It was noted that the accounting world has been successful in recent decades in identifying potential talent when there is still time to get the proper training. The investment world needs to get to diverse individuals early on and share with them what skills, attitudes, and attributes are needed to be successful so that those who are attracted by those things will know what they need to do to be qualified for investment roles when the time comes.

While schooling is important to get your foot in the door, learning the investment business is very much done through apprenticeship. It is important that young diverse talent has access to the mentors who will guide them through the early years of their career and give them the opportunities to broaden their skill sets at appropriate intervals. Companies can create programs to ensure that unconscious bias does not lead to only a certain type of person being selected for such opportunities.

What’s the goal? 50/50 male/female? Numbers are arbitrary and it could take years, even decades, to get to that level at the current pace. But getting to inclusive is more immediately achievable. The goal is to create an environment where all cultures and backgrounds feel heard and want to stick around. It will be harder to get to 50/50 if your diverse staff keep leaving because they don’t feel welcome.

3.) To get the most benefit out of having a diverse workforce:

The problem: retention. Even if you are able to make diverse hires, you will not garner the benefits of diversity if you are not able to make everyone feel heard (the “inclusion” part of diversity and inclusion), as the struggle to fit into an unnatural mold will be exhausting for many. While people are struggling to conform, they will not feel comfortable providing their best ideas for fear of dismissive attitudes from colleagues. Eventually people will depart, leaving your team back at square one in trying to restock the talent pool. Many firms will see this as a learning moment and assume that people who bring in diverse perspectives are a bad fit and they decide to hire people more likely to stick around – which often means hiring people who look or think or act as the current employees already do.

The solution is to focus the company’s efforts on inclusion. This means getting to know everyone, learning to play to each person’s strengths and listening to their points of view. This may be challenging to some, but it has been proven (see the next blog for research citations) that the more difficult and uncomfortable investment discussions that come from heterogenous teams result in better team decisions. As one speaker said, unanimity feels like a good thing, but hard things should be hard.

One way to work on the inclusion problem is to get to know each other. We have been conditioned to not ask about others who are different at work, to “keep it professional”, but getting to know the people on your team allows for the evident differences to fade and the commonalities to shine through. It also allows people to open their minds to the differing perspectives and realize the value they bring to a conversation. Diverse teams must find ways to bring the diverse points of view out, or the effort will have been wasted.

In a crisis, all of the differences and negative intent assumptions matter less and people come together to get something done. And afterwards the team is stronger for it. As a company, you have to figure out how to get your staff there without a crisis. Managers who are willing to show vulnerability to employees by admitting that this is hard and they need help will get their staff to care. Be fallible. People like the underdog.

I typed pages and pages of notes from this event and there were other really great points made during the morning, but I have attempted to faithfully provide the major areas of discussion. Please feel free to comment on the CFA site, particularly with substantive efforts you have been involved with or are trying that are intended to make a difference in the diversity profile of our industry.

Event Recap (part 1): A completely imagined conversation between two CFA charterholders (CC1 and CC2) in Minnesota

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By: Hilary Wiek, CFA, CAIA, Society Volunteer

CC1:  When’s the next CFA event coming up?

CC2:  June 5, 7:30 to noon at the Women’s Club of Minneapolis.

CC1:  Wow!  That’s long!  What’s the topic?

CC2:  Diversity and Inclusion.  Looks like there will be a variety of speakers, including a Keynote from someone at Blackrock.

CC1:  That sounds like a seriously long sales pitch.  Plus our team is humming along and this is no time to mess with the process by inserting someone who isn’t a good fit into the investment team.  I don’t see the relevance.

CC2:  Yeah, I think I’ll skip.  Sounds like it’s just for the ladies, and there are so few of them in the CFA Society that it probably won’t even be a good networking opportunity.

What actually happened:

Eleven tables of roughly eight places each were filled with women and men (the vast majority were women; I had no idea the CFA Society of Minnesota reached so many!) in all stages of investment career progression.  There were representatives from banks, asset managers (local to global), consultants, and allocators such as pensions and non profits.  The keynote speaker was a man – of mixed African American and Syrian ancestry who had been raised in a white family with two white sisters and one Korean/African American brother.  And he’d worked to purposefully staff President Obama’s administration during both administrations.

There were no sales pitches – these were discussions about human capital and how they interact, a topic of never-ending need for improvement at all organizations.  Best practices in this area will lead to competitive advantage (evidence was provided – see successor blog posts on this), but everyone who spoke admitted to still being on a journey to improve in the area of diversity and inclusion and no one felt they had reached the finish line – and likely never would.  This is a topic area that requires intentionality and high-level leadership support for a dent to be made, and even with those elements, it will still take many years to arrive at an ideal vision.

The event mixed up the formats – interactive presentations, table discussions, and panels.  The assemblage was instructed at the beginning to go beyond discussion of the problems; this has been done for decades ad nauseum.  We were charged with having an important and uncomfortable conversation with the purpose of arriving at concrete things we could do to improve the diversity and inclusion of our industry currently dominated by white males. 

As for whether this event was appropriate for everyone – data was provided from one study that showed that diverse investment teams performed spectacularly better than homogenous teams.  The varying perspectives, and added conflict they bring, provided better researched investment ideas because the teams pushed back harder against colleagues who were given no benefit of the doubt because of any sort of shared tribal affiliations. 

In succeeding blog posts about this event, I’ll dive into further details from CFA Institute research on the subject of Diversity and Inclusion as well as outline aspects of the hottest topic areas in the space.  Finally, I’ll share some concrete steps that firms can consider to better improve the hiring and retention of diverse candidate and staffing pools.