Until January 20, 2021, Condoleezza Rice will have been the highest-ranking African American woman to serve in the executive branch of the US government, having served as secretary of state from 2005 to 2009. With Kamala Harris’ assumption of the vice presidency in January and discussion of an African American man leading the Pentagon for the first time, extant gender and racial glass ceilings continue to shatter, prompting a pause to recognize progress in the pursuit of diversity. But for many investors, progress continues to be too slow. Investors often seek to represent the urgency for more progress on diversity, equity, and inclusion (DEI) in their portfolios, but what is possible to reflect investor concerns in these areas?
For those familiar with Aperio’s approach to customizing portfolios, you know that we talk about three tools that help reflect an investor’s values or mission in a portfolio: exclusions, tilting, and active ownership. Each of these offers opportunities to incorporate DEI into a portfolio. Depending on the priority of specific subtopics within DEI, different investors will select different issues to emphasize and different strategies as appropriate.
As an example, when thinking about diversity on boards of directors, we have options available using each of the three tools. Clients can exclude companies with no directors who are women or racial or ethnic minorities. Alternatively, they can choose strategies that will use percentages of directors as the basis for scoring companies and tilting toward those with better average scores. Or finally, SRI proxy voting promotes diverse boards by voting against measures that don’t promote having women and minorities serving. No single approach is right for everyone, and there are good arguments in favor of each approach and valid criticisms of the limitations of each, which may be why we have clients that use all of them.
Discrimination, inequity, and exclusion are the context within which much economic activity exists. When seeking to reflect DEI values in a portfolio, it may be appropriate to think broadly about the context of life for women and communities of color. Focusing only on percentages of women or minorities in specific job categories, or even in the total workforce of a company, may capture only a portion of the DEI landscape.
A specific part of the DEI conversation focuses on questions around racial justice. Topic areas that are frequent parts of conversations about appropriate exclusionary criteria when seeking to reflect racial justice concerns in a portfolio include predatory lending, private prisons, and civilian firearms. All have disproportionate impacts on communities of color. In addition, tobacco companies are sometimes accused of targeting communities of color and creating disproportionate health impacts for those communities. Each Aperio client considers which combination of these issues most reflects the racial justice concerns they have in making their decisions.
LGBTQ inclusion is another topic under the broad umbrella of DEI, and another area where more data would be helpful in better representing the issue in portfolio construction. Both exclusionary and tilting strategies are possible when seeking to reflect these issues in a portfolio. This is an area where we rely on nontraditional data sources, like advocacy organizations, to help fill gaps in ESG research. We use Human Rights Campaign (HRC) ratings of companies to assist with this topic area. Unfortunately, when using nontraditional data sets, we have to accept certain limitations. In this case, the HRC ratings are large-cap and US focused, constraining their application.
Diversity and justice issues are nuanced, and we do not seek to oversimplify. Our expectation is that we will all continue to learn more about these issues and how to evaluate them in publicly traded companies over the coming years and that available data will continue to improve. For these reasons, we describe customization of a portfolio as a journey. We seek to continue to engage with our clients to find the best way of reflecting the larger themes of diversity, equity, inclusion, and justice as each client thinks about them.
Send questions or comments to blog@aperiogroup.com.
