Insights

The importance of ESG for asset managers – Leaning into the 'S' of ESG

Maureen Doyle-Spare and Garret Matthews, Asset & Wealth Management at UST

Financial services firms have a long way to go

Throughout the financial services industry, women and minorities remain underrepresented at all levels of the corporate ladder. According to a recent study, as roles increase in seniority, the representation of women and minorities decreases even more. Asset and wealth managers are behind other sectors within financial services when it comes to a diverse workforce, and since 2018 underrepresentation has declined at certain corporate levels. Addressing underrepresentation across women and minorities and securing a diverse workforce can be a key step in reaching the social component of ESG.

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Why is ESG important?

Growing concerns about the threats facing the planet, economies, and societies have, in turn, accelerated the environmental, social and governance (ESG) investment trend. There is an increasing focus on companies' role in tackling these threats, which has impacted asset managers' decisions. Investors want to ensure they deal with companies focused on making a measurable contribution to address these threats. Global regulatory moves and a series of regulatory initiatives make ESG themes more investable, thereby unlocking substantial additional investment flow.

To date, sustainable investors have been more focused on environmental and governance factors than social ones, though we know that social issues can negatively impact investment returns. But recent events have turned the tide, and investors are now paying more attention to the 'S' in ESG.

One way for firms to focus on the "S" in ESG is through Diversity, Equity, and Inclusion. For firms to enhance diversity and inclusion and achieve their goals, they must implement a comprehensive Diversity & Inclusion policy. However, recent stats show that only 44% of asset managers have done this. Even more, only one-third of asset managers have a dedicated team responsible for promoting their Diversity & Inclusion policy and overseeing the firm's diversity and inclusion initiatives.

Certainly, COVID-19 was a catalyst that intensified an already existing fragile community. We are at a critical time in history for financial services firms to embrace the social component of their ESG strategy fully and to act to crystalize corporate principals and pledges into a tangible and executable long-term sustainable strategy to drive impact for the underserved and drive change with true purpose.

Consequently, firms with a strong ESG proposition may realize significant value creation. It correlates with higher equity returns, a reduction in downside risk, and higher credit ratings. And the focus on the 'S' of the ESG means value creation in human equity in transforming lives.

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Diversity and inclusion challenges in asset management

While there are numerous debates on ESG investment strategies, from greenwashing to data normalization and disclosure regulations, most Asset and Wealth Management firms agree on the intrinsic value that comes from the diversity of thought and the need to lean organizations into many of the DEI corporate objectives.

Over the past few years, many financial services firms have made diversity pledges but have struggled to achieve those goals. Leading institutional investors, asset managers, and other market participants have made multi-year, multi-billion-dollar commitments to improving social and racial equity. However, many firms lack the infrastructure to truly nurture a new diverse workforce and provide the skills and training, such as highly sought-after technology capabilities from cybersecurity to application development.

It all begins with hiring. Firms must adopt new hiring practices that are fair and equal to all candidates. Unconscious bias is one of the main roadblocks to fair and equal hiring practices. Unconscious bias has gloomed over the hiring process for years and continues to prevent firms from achieving an actual diverse workforce. Of course, unconscious bias isn't something firms can eliminate overnight. Firms must leverage programs that tap into non-traditional hiring sources and provide access to diverse candidate pools. Using non-traditional hiring sources will allow firms to invest in underprivileged and under-represented communities and boost workforce diversity.

Fair and equal hiring practices are only one aspect of diversity in asset management. Equally important is employee development. A robust learning and development program will provide employees with the skills they need to advance within the firm, give them a sense of community, and lead to more inclusive company culture. As vital as training and mentorship are for employment and career development, it is just as significant for transforming lives to deliver the true spirit of the 'S' in ESG. Many fall short after the hiring phase, which hampers their DEI goal progression.

To bring actual value to an organization and diversity of thought means looking for more than recruiting from Ivy Leagues and competing with a hundred other firms to capture the small diversity sector. Actual value comes from looking into the backyard of our communities to improve the diversity in the Asset and Wealth Management industry.

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The value in enabling diversity and inclusivity

As mentioned, firms that put the time and effort into enhancing their hiring practices and developing their employees will positively affect their company culture. The benefits of a diverse workforce and healthy company culture can prove invaluable and serve as a differentiator against the competition and pave the way for social equity.

A diverse workforce is made up of individuals that come from various backgrounds with different experiences and unique perspectives. They bring insights and a greater understanding of specific markets that the firm would not have if they did not leverage these non-traditional hiring sources. Collaboration between the team can lead to increased creativity, better decision-making, and more effective problem-solving.

As a result, firms are looking to build a more inclusive company culture and are taking a much keener interest in their employees' health and well-being. From providing cleaner and better workplaces to additional healthcare benefits, including a focus on mental health, they genuinely want to make a difference. As an added benefit, DEI can lead to better social cohesion, create corporate benefits from long-term shareholder value, and benefit a company's financial returns.

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How UST's Step IT Up helps create value for ESG investing

Transforming lives is one of the core values that UST has embraced and is perfectly demonstrated in our UST Step IT Up (SIU) program. The program has been running for 10+ years when the ESG focus was not top of mind. Ahead of its times, UST wanted to make a difference with an initiative to drive change by developing a new generation of technology experts through diversity in hiring.

Real stories, like Brandon Cooley's, a UST Step IT Up program graduate, motivate us daily. Brandon transformed his life to build a career as an IT technologist focusing on cybersecurity. In the process, he became a catalyst of inspiration for his future generations. His and other inspiring stories bring to life the impact DEI in the Asset Management and Wealth Management sector can potentially have by leaning into the 'S' in ESG.

It's all about driving change together with a purpose.