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When it comes to climate investment funds, diverse management is imperative

Diverse investment management
Fizkes

The engine behind green business is the same as any business: capital. And while social, human and natural capital are all critical, financial capital is the one form that systemically fails the companies and leaders working on the most impactful solutions for the Sustainable Development Goals.

Venture capitalists decide who gets to be a billionaire and what solutions reach billions in market penetration. Real asset investors choose what critical infrastructure is built, where it’s built and who benefits from it. Fixed-income investors are able to drive how much of the bond market is green, or better yet, which bonds adhere to the 17 Principles of Environmental Justice. Public equity asset managers drive what kinds of companies are valuable and thus have the capital to grow, to what industries retirement savings flow by default and what companies can achieve a scale that affords them outsized political and policy influence.

Needless to say, investment managers and financial advisers are powerful. And as is the case with many axes of power, financial professionals across asset classes are disproportionately male and white.

In a 2019 study, the U.S. National Academy of Sciences found evidence of racial bias in the investment decisions of asset allocators, including rating white-led funds more favorably than Black-led funds at similar strong performance levels.

Granular, industry-wide data is hard to come by — even after the national awakening brought by the Me Too and Black Lives Matter movements. In 2020, when the Diverse Asset Managers Initiative (DAMI) surveyed the 30 largest U.S. investment consulting firms to gain insights into gender and racial representation, only 16 responded. Here’s what we do know: in the United States, partners in venture capital firms are only 4.1 percent female, with those women being 67 percent white, 16 percent East Asian, 7.7 percent South Asian, 4.8 percent Black and 3.5 percent Latinx. Mutual fund, hedge fund, private equity and real estate fund managers are collectively 98.7 percent white male-led.

ESG funds, including those focused on climate change mitigation, do not fare better. According to a 2019 survey, white staff represents 79 percent of the employees of U.S. SRI/ESG mutual funds.

It’s important to increase the asset allocation in women- and BIPOC-led climate funds because they are acutely concerned and engaged in climate-related financial risks and impacts, they are the ones disproportionately affected by and thus uniquely positioned to make wise investment decisions in solving climate change, and they are key sources for driving innovation.

A recent survey by PRI illustrated that globally, women are more engaged on climate-related issues than men, especially for people 35 and older. Another recent study by the George Mason University Center for Climate Change Communication and the Yale Program on Climate Change Communication found that Black and Hispanic communities in the U.S. are also more concerned and willing to engage on climate issues than white communities.

Using six categories, ranging from "Alarmed" (most concerned about climate change and most supportive of climate policies) to "Dismissive" (reject the reality and threat of climate change and oppose taking action), they found that Hispanics/Latinos (69 percent) and African Americans (57 percent) are more likely to be "Alarmed" or "Concerned" about global warming than white Americans (49 percent), as well as more willing to join a campaign to convince elected officials to take action to reduce climate change. This heightened concern logically would lead women and BIPOC fund managers to perform climate-related diligence on investment deals and have a climate-forward approach to their portfolio.

Climate change makes virtually all aspects of the economy and society, especially existing inequalities, worse. Climate impacts, including heatwaves, droughts, rising sea levels and extreme flooding, disproportionately affect women and people of color. Yet, due to their local knowledge and leadership in climate change solutions, such as sustainable resource management, and their responsiveness to community and consumer needs, women and people of color are uniquely essential in solving climate change.

In the United States, race is the No. 1 indicator for the placement of toxic facilities, including climate-polluting ones. This reality also means that Black and brown financial leaders have on-the-ground knowledge of transitioning from dirty to clean and the types and structures of investments that will bring retail and institutional investors risk-adjusted returns.

Knowledge and information, including local knowledge, are core to what investors use to outperform peers, indices and allocator expectations. For example, HSBC’s investment policy states, "We look to deliver quality and value through a robust risk management framework that leverages our global capabilities and local knowledge to drive better investment decisions across a wide range of investment strategies."

Lastly, diversity drives innovation. Study after study shows diversity, including gender and racial diversity, leads to a better return on investment, return on equity and revenues. As Katherine Phillips put it, "Diversity jolts us into cognitive action in ways that homogeneity simply does not."

In investment, why pay for an asset management firm if you can just buy every stock in the market and fare the same? Why pay venture capital fees if you can just, as the industry says, "spray and pray" in a suite of startups as an angel investor?

Part of the value proposition of fund managers is that their investment teams have specialized knowledge and perform the diligence that the asset owner or allocator does not have or cannot otherwise implement. Climate investing is no exception. Given climate change is such a pervasive and entrenched problem, it will take novel thinking and new investment approaches, which will be missing without such gender and racial diversity.

One hypothesis that VC Include (VCI) will start to test this year is if and how diverse-led climate funds lead to diverse green business ownership, leadership and workforce opportunities in climate-impacted communities. To that end, VCI is launching a Diverse Climate Fund Manager initiative to engage and financially support women and BIPOC emerging managers that are addressing climate change in their strategy.

Why aren’t asset owners allocating capital to women- and BIPOC-led climate funds? As Rachel Robasciotti of Adasina Social Capital states, "The problem lies in how the asset manager evaluation process exacerbates existing inequities in financial services, while also failing to account for real impact and diversity outcomes." These barriers include needing to have at least $200 million in assets under management, or AUM (which starts with personal wealth that women and BIPOC leaders seldom hold), a three-year track record and laborious questionnaires (some with over 1,000 questions).

Although it’s important to not conflate emerging managers with diverse managers (not all diverse managers are new and vice versa), women- and BIPOC-led funds are disproportionately newer and may not meet the three-year track record threshold. For example, 73 percent of women-led asset management firms were founded in the last five years.

The Due Diligence 2.0 Commitment outlines nine ways forward for a more equitable asset allocation and investment sector, as follows: consider track record alternatives; expand what it means to work together; reassess AUM as a risk metric; respect BIPOC time; contextualize fees, including historically unrecognized risks; be willing to go first; offer transparency about remaining hurdles; and provide detailed feedback.

There is a generic diverse asset manager directory run by Emerging Manager Monthly, providing information on minority, women, veteran and disabled-owned firms where you can filter by asset class/investment strategy. Hannah Davis of Techstars and I put together this list of women and BIPOC climate fund investment advisers and asset managers. This list is primarily intended to help retail and institutional asset owners allocate capital to diverse-led climate-friendly funds. Other uses include syndicating with women- and BIPOC-led funds and finding diverse investors for a company’s growth. To add to the list, please fill out this form.

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