Sustainable businesses focus on three interrelated areas: environmental sustainability; corporate social responsibility; and the sustainability of people. And their investors (ultimate owners) are increasingly turning to key metrics to assess progress on environmental, social and governance (ESG) and diversity, equity and inclusion (DE&I) to make their investment decisions. More needs to be done within DE&I in particular, as the pace of change lags the public markets – and that matters.
Sustainability attracts and retains talent
We know that a diverse and inclusive culture attracts and retains top talent. This leads to competitive advantages for companies that have inclusive cultures over their peers, as well as better performance results. These companies are also more likely to have a better understanding of their customers and better scale to meet changing customer demands and needs. These companies will also have better decision-making processes as idea generation, opportunity generation, risk identification and mitigation are all improved.
Public companies are leading in this area due to public scrutiny, legislation requiring behavioral change, and increased shareholder awareness of the connection between improving DE&I and ESG actions, and improving performance. performance results. Without the pressure of an annual meeting, proxy votes and public disclosure, there is a gap in demand for similar disclosures from investors in private market companies.
Data from UBS (PDF) indicates ownership of infrastructure, direct real estate and private equity was between 7.0 and 7.5. % of global market capitalization in 2020. However, from an ESG perspective, this is an understatement given that these studies include debt. When we look at equity alone – as equity control and drivers of influence change – the proportion of infrastructure, private equity and real estate in global markets is much larger. Excluding bond markets from UBS data cuts the estimated global market capitalization by almost half, so the private ownership share of the global pie is closer to around 15% of total assets.
Private ownership is important, and today it accounts for a large share of ownership and influence in global markets.
Address the under-representation of women as recipients and recipients of capital
Actions are required across three main stakeholder groups:
- Asset owners: pension funds, sovereign wealth funds, endowments, insurance companies and other institutional investors, such as family offices, which are the sources of long-term capital;
- General Partners (GPs): who manage the funds and allocate capital to the underlying portfolio companies;
- Portfolio companies: seeking capital to fund their business strategy and future growth.
There are material disconnects between the ambitions of asset owners and the GPs who make investment decisions on their behalf. For example, 65% of asset owners say they consider gender diversity important when investing, but only 25% of GPs say they’ve been asked about it during the due diligence process, let alone reporting on ongoing governance of asset owners on diversity issues. Similarly, among GPs, significant differences in perception exist between men and women as to the reasons for a lack of gender balance in key decision-making roles. Women are more likely than men to identify internal factors (such as leadership commitment and biased hiring practices) as significantly more important than external factors (such as women’s lack of interest in these roles ).
There is no doubt that asset owners are seeking to address these imbalances. Research from Mercer and the World Economic Forum found that while less than 10% of advanced asset owners specifically allocate to women and minority-owned businesses and funds, one-third plan to make an allocation in the near future. . In addition to these “bottom-up” actions, more holistic strategies are needed.
1. Diagnose using data
This means understanding talent flows through the organization (hiring, promotions, departures) by gender to identify areas to focus on and increase transparency. In many organizations, focusing on equalizing promotions is the area that has the most impact. However, GP hiring practices are ripe for improvement, as evidence suggests that “cultural fit” is significantly more important than experience in assessing applicants, and existing networks are most often used for references. Collecting data on hiring will help set appropriate medium- and long-term goals and measure progress on gender imbalance.
The same process can be applied to investments in portfolio companies to understand gender diversity at every stage of the investment process and address due diligence biases. For example, in private equity, women entrepreneurs appear to have a lower likelihood of second-stage funding compared to men, and report being asked different questions than men during due diligence. Since deal sourcing is often done through existing networks, this reinforces the need for diverse teams to access the widest possible pool of opportunities.
2. Document commitments in DE&I
Procurement organizations have shown that transparency of goals, metrics, progress, and persistence over time drives results. For example, in financial services overall, 81% of organizations say they are committed to improving DE&I, but less than half have a multi-year strategy to get there. Evidence suggests that these numbers are significantly lower in private markets.
3. Engage Leaders to Drive Personal Commitments
This includes ensuring that they are personally accountable for their goals and incentives and are held accountable for results. The top tone can be effective, but it must first be authentic and persistent.
4. Take Action
Implement strategy, including making changes to investment processes and internal policies and practices, monitoring progress, and being transparent in documenting results.
We therefore end with a call for better transparency from private companies – and private company owners – for better ESG and DE&I information to ensure that appropriate progress is being made. This is particularly important given that all areas of diversity are correlated with better investment outcomes for all members of the investment value chain. This goes for public and private markets, and it is worth working for.