The financial sector, particularly investment firms, is grappling with an uncomfortable reality: Women make up a mere 9% of global Investment Committee members, while Black professionals account for only 7% of entry-level investment roles in North America, as stated in a McKinsey report. These figures not only highlight the current state of affairs but also mark the urgency for change in this sector. While these statistics call for increased diversity, equity and inclusion (DEI) metrics, they alone can’t tell the full story or resolve the root causes.
The Overlap and Engagement of DEI and ESG
As explained by one panelist, DEI is more than just a notion—it is a business imperative that directly affects performance across the entire organization. While DEI is undeniably important, there can be confusion regarding its interaction with Environmental, Social, and Governance (ESG). To clarify, industry insiders (DEI practitioners and investment specialists) from the leading private capital firms explained that although both are separate, there are often synergies. Key stakeholders, including future and current talent, investors and regulators, play crucial roles in both domains. It's also worth noting that the relationship between DEI and ESG may vary depending on the stage of the investment process.
Right now, we are at a critical point where data plays a major role in how we think about both ESG and DEI. As one insider pointed out, a key area of overlap between the two is an increasing dependence on measurable criteria to ensure an outcomes-based approach, whether it’s improving job quality and retention or establishing the relationship between diversity and business performance. However, the power of data can also become tempered if it is not handled in the right way.
In addition, Limited Partner (LP) inquiries for evidence of diversity are driving culture transformation within alternative firms. As one senior buyside professional noted, a consistent rhythm of questions from LPs will make its way to senior management and drive focus. When LPs have a board seat, they can make impactful pushes for diversity in board composition as well. To respond to those inquiries and demands, firms are focusing more on data transparency, particularly in ESG and DEI areas, to highlight their commitment to these initiatives. For instance, they will often use a scoring mechanism for DEI targets in order to assess investments, driving engagement with portfolio companies.
Effectively Using Data
Those private capital insiders who offered their views emphasized that frequent data collection combined with forward-looking perspectives and public data sharing are essential elements in progressing DEI initiatives. But obtaining robust data coverage is a complex task, particularly when attempting to draw out key elements such as employee engagement. One interviewee mentioned that their latest DEI survey revealed an 80% engagement rate, which is encouraging. However, the question remains: How do we achieve broader engagement? Some employees may be hesitant to participate, even with anonymized data collection, highlighting the need to effectively communicate our usage of this data and its implications for policy changes.
Additionally, the focus should not solely be on the positive aspects but also on the long-term trajectory. It’s important to consider empirical data and qualitative insights hand in hand because the data alone may not always provide a complete picture. We must continually evaluate the depth of our data—beyond simply tracking numbers of minorities, we need to explore how these individuals are positioned within an organization.
Establishing internal standards that demonstrate commitment to inclusivity can indirectly influence external partners. However, it's also crucial to acknowledge the challenges in this process. Benchmarking, particularly for smaller groups not legally required to report their data, is a major challenge. The sensitivity of race and ethnicity data adds another layer of complexity, which is further compounded by legal and cultural differences across regions.
Overcoming these challenges requires effective communication and encouraging active participation in data collection. Even when certain information may not be legally required, or may be difficult to obtain, the attempt itself can yield valuable insights. Frequent data captures and the publishing of data will enable better benchmarking and standardization as well as encourage adherence to diversity commitments and DEI improvement plans.
Yet, an issue that frequently emerges is the pipeline problem, particularly when trying to attract diverse talent at the senior level. Often organizations need to look internally to address this issue, evaluating everything from compensation to the diversity of high-potential employees. Organizations must also ensure their external image is attractive to a diverse pool of candidates. This includes having broad HR policies and an enticing company culture. This pipeline must extend from junior roles right up to senior positions, creating a more balanced and diverse talent pool across all levels.
Beyond Representation: Focusing on Equity
While much of the emphasis is often placed on the “D” in DEI, equity and inclusion are just as important. It is one thing to assemble a diverse workforce; it is another to create and foster a culture where different points of view and ideas are valued and where everyone has access to the same level and number of opportunities.
As one contributor put it, equity is about bringing balance into the organization. More than simply hiring more talent from underrepresented communities, such as women and minority groups, it’s critical to ensure these new hires truly have a seat at the table when it comes to showcasing the impact of their work and having the opportunity to advance their careers. Because when this focus on equity is missing from the equation, what we tend to see is larger populations of women and minorities in the workforce, but ultimately subjected to the same patterns of inequality when it comes time to make decisions about pay and promotions.
However, even more can be done to improve equity beyond providing access to opportunities. More specifically, diverse hires would be put in a far better position to achieve promotions if organizations dedicated more time and resources to providing adequate mentorship and guidance, which has been shown over the years to have a direct impact on career advancement.
It's also important to keep in mind, as many panelists noted, that equity should be viewed as more than a DEI reporting metric, but also a necessary and effective means of incentivizing performance. In fact, recent and ongoing reporting from both McKinsey and Impact Capital Managers have revealed a direct and positive correlation between the diversity of teams and the overall performance of private equity firms, once again highlighting the increasing need for data to support and encourage a broader focus on DEI throughout the financial sector.
Responsibility, Persistence and Authenticity for the Road Ahead
Overall, the insights gained from the contributors have helped to illuminate the already crucial role of DEI metrics in the financial industry, as well as the need for continued refinement of these practices and our understanding of diversity as both a vehicle for equality and a driver of business performance. They have demonstrated that it is not just about having the right data, but about using it responsibly, effectively, and holistically to bring a greater sense of harmony between DEI and ESG initiatives, as well as to promote progress beyond the diversification of the workforce and toward the creation of true equity for all.
Going forward, it will be incumbent upon each organization to embrace these initiatives with transparency, persistence, and authenticity to foster a more inclusive future. With continuous effort, we can hope to see the day when the financial sector will no longer need to unravel DEI metrics—it will be woven into the fabric of the industry.
