Race, ethnicity and investing

Diversity has been on the corporate agenda for years, with many companies keen to talk up their equal opportunity hiring policies and diversity and inclusion (D&I) initiatives. Yet while overt racism is perhaps less prevalent in the workplace than it once was, racial discrimination has not been eradicated.

This is starkly evident in the way black people are underrepresented at senior levels in many businesses. And yet many white employees of those same businesses will be unaware of the problem.

Four main factors are at play in maintaining this state of ignorance. First, it can be extremely hard for black employees to speak out. Because they can be few and far between in some companies, and tend to occupy junior or middle management positions, they may struggle to make themselves heard.

Second, many white people remain unaware of their white privilege – the ability to live their lives without ever having to think about how their skin colour affects the way they are treated. They may become uncomfortable and defensive when talking about racism and discrimination – US academic Robin DiAngelo sees this response as evidence of “white fragility” – preventing open dialogue on the issues.

Third, ethnic diversity has often been left behind as D&I projects have focused on gender, and black people have been categorised alongside Asian minorities in inclusion initiatives under the BAME acronym. This has hidden the ongoing underrepresentation of black employees, particularly at senior levels. As of October 2019, there were only six black CEOs among S&P 500 companies, and 37 per cent of those firms did not have a single black board member.¹

“We need to ensure that, when we say black, we mean black, not BAME,” explains Elizabeth Atoyebi, associate for infrastructure equity at Aviva Investors. “There are a lot more ‘palatable’ demographics in BAME, and some people say they want to see more BAME representation because they don’t want to say ‘black’.”

Figure 1: Ethnic minority representation in FTSE 100 companies in 2019 (per cent)

Fourth, the issue is compounded by class discrimination in many blue-chip companies. Class is another critical barrier to being hired and promoted, and black minorities in Europe and the US are, on average, from less privileged backgrounds.²

These factors help explain why, despite well-meaning talk at a high level, there has been no real progress in the participation and promotion of black employees.

“Whether it is specifically in terms of black people or more broadly people from ethnic minorities, few companies have dared to set targets,” says Marte Borhaug, global head of sustainable outcomes at Aviva Investors. “A good example was the Parker Review in 2017, which said every FTSE firm should have at least one ethnic minority board member by 2021 – not the most ambitious target, but at least it made some recommendations. Yet 59 per cent of FTSE 350 companies still have no ethnic minority representation today. That’s just not good enough. We need to see firms being clear about what they’re aiming for and when they will deliver.”³

Dawid Konotey-Ahulu, co-founder of the investment consultancy Redington and #TalkAboutBlack initiative in the investment industry, likens the difficulties faced by young and talented black professionals to “kinks in the hosepipe” that stop their careers from flowing. These range from socioeconomic differences to entry-level barriers, discrimination in career progression and the fact the problem has traditionally been low on company boards’ agendas.⁴

“Every organisation needs to put this onto its radar, the same as it would any major initiative. In the past, I had never had a conversation about the B in BAME, and even the broader BAME conversation was a bit of a tick-box exercise. Companies certainly didn’t take it as seriously as focusing on margins or their strategy for developing new products. This needs to be elevated to the same level,” says Konotey-Ahulu.

He advocates two key actions to help change company culture. First, companies should open the discussion on race internally across the firm. Second, and perhaps most importantly, those in senior management positions should take it upon themselves to understand the problem and what they can do to address it.

“Senior management has to go on a learning process, understanding what it is like to be black, and what the kinks in the hosepipe are. It’s like anything; to be an expert on climate or a strategic initiative, you’ve got to go and learn about it,” explains Konotey-Ahulu.

While the investment industry itself has considerable room for improvement, asset managers also face increasing pressure from clients to demonstrate effective engagement with companies in other sectors, as well as governments, non-government organisations and industry bodies.

This is crucial because, in order to effect change, senior executives need to connect the issue of racial discrimination to their own business. According to Baig, many companies simply don’t recognise their power to be an agent for change through relations with suppliers, staff, consumers and society.

“We need to help them – and us – recognise their role, understand where they are on the journey, set targets and ambitions and translate those into policies and initiatives,” he says.

It will be a learning process, but Borhaug says we can take a lot from what has been done on gender equality. “We didn’t make real progress until we started taking meaningful action, for example with countries imposing quotas of women on boards and investment firms changing their voting policies. We now need to take the same kind of action for black representation in the workforce and the boardroom,” she says.

To incorporate black representation more explicitly into Aviva Investors’ own engagement strategy, Borhaug and Baig have identified a framework around five key areas.

“First, we expect companies to create an inclusive culture for black employees. Firms should commit publicly to a D&I agenda that includes a focus on ethnic minorities, with policies in place to promote inclusion and tackle discrimination of all kinds, including on the basis of race,” says Borhaug.

“More specifically, firms should commit at board level to zero tolerance of harassment and bullying. In the UK for instance, we expect companies to sign up to the Race at Work Charter, which has seen more than 190 companies in the UK sign up since its launch in October 2018,” she adds.

This kind of commitment may not seem like much, but research shows not all leaders are ready to take even this minimal step. The UK 2018 Race at Work Report found only one in three employees surveyed said there was at least one senior leader or champion in their organisation who actively promoted equality, diversity and fairness, showing no change since 2015.⁵

In addition to public commitment and policies, research and stakeholder interviews frequently highlight the need for financial support for initiatives aimed at tackling racism at work, including dedicated job roles, programmes, events and other activities. Although employee networks play a crucial role, companies should ensure they are properly supported with resources. To that end, Aviva Investors is encouraging investee companies to dedicate time and money to such initiatives.

The second point focuses on representation at a senior level.  “We will be asking companies to commit to ethnic diversity on boards and in senior management teams,” says Borhaug. “We need to rethink how we are holding those companies to account in terms of representation.” Aviva recently became a founding member of Race the Ratio, a campaign led by the Confederation of British Industry to encourage companies to improve the representation of black and ethnic minorities in their organisation. By signing up, companies commit to setting targets for their boards and senior management teams.

The third area involves diversity proofing companies’ business strategies. Across the globe, but even in majority-white countries, black consumers form a large part of the customer base, and firms should be thinking about how to satisfy their needs with products and services.

Research by PwC demonstrates the value of this approach. In 2018, it analysed the D&I strategy of 50 businesses, including leadership tone, HR policies and whether there were any D&I initiatives. The research found that the most successful firms had a D&I strategy alongside a closely aligned corporate strategy.⁶

Another aspect is the importance of embedding the risks stemming from racial discrimination into the enterprise risk management framework. Companies manage a variety of business-related risks including climate change and staff retention. It is good practice for firms to include risks associated with racial discrimination, enabling them to recognise, measure, understand and tackle them.

The fourth area of engagement involves putting pressure on companies to review their human resources policies and practices, from identifying and recruiting talent to creating a level playing field for promotion and improving retention. In a 2018 update to the McGregor-Smith Review, over half of BAME employees felt they would have to leave their organisation to progress their careers, compared with 38 per cent of white British employees.⁷

Finally, companies will be called on to collect relevant data, set targets and measure progress. “You need data to be able to hold companies accountable: when engaging with companies, we are somewhat hamstrung by the lack of it,” says Baig. This is true for diversity in general, but even more so for black representation.

Figure 2: Percentage of European and American firms disclosing…

Connecting diversity with good business practice

While there is an ethical imperative to act, companies that fail to address the issues in their own organisations could quickly find there are financial consequences. David Cumming, chief investment officer for equities, and Colin Purdie, chief investment officer for credit at Aviva Investors, believe companies that don’t change will be shunned by consumers and investors.

In a recent BBC interview, Cumming cited Facebook as an example of a company that has seen a hit to its reputation and advertising revenues through failing to address hate content on its platform. Up until last year, content from white supremacists could still be posted, while racist adverts were still appearing until recently.

He said: “They have got no real HR framework to govern their approach to free speech at the moment, and their current defence around impartiality and complaining about the lack of regulation is viewed as an abdication of responsibility.” ^8,9

At least some businesses are waking up to the issue. Baig notes some retailers have started to proactively allocate 15 to 20 per cent of their shelf space to products supplied by black-run businesses.¹⁰ Purdie says this will benefit the retailers, particularly if consumers get behind the move.

“These are the trends investors need to understand, support and position for. Companies that don’t support them or change will suffer,” he explains.

Borhaug believes asset managers also need to engage with governments and regulators to create and implement legislation, not just on broader diversity matters but specifically on the issues faced by black people.

“We need to push governments to face up to their own challenges and recognise institutional racism. It may seem like a non-business issue, a political issue that is hard to talk about, but we can tell governments we don’t want to live in a country where racial discrimination and police violence happen, and we can help support the organisations trying to tackle it,” says Borhaug.

“We have got a role to play, but we can’t change the world on our own,” adds Baig. “When you are dealing with a systemic issue like institutional racism, it needs the strong hand of government. Industry bodies will also have to become more vocal on this and it is our responsibility to push them to take more action.”

The best-run firms will not wait for direction from government before doing the right thing. Konotey-Ahulu notes that companies with strong leadership will be proactively making the profound changes needed.

“You need to take your whole firm on a journey, somehow, and that’s not easy. That is where real leadership comes in, where you stand up and say: ‘This is the mountain we’re going to climb. I want you to come with us on this journey, and if you don’t want to come with us, you need to find another firm.’”