How diversity, equity and inclusion factors help asset owners and managers to select more profitable companies: Charlotte Moore, Karen Shackleton and Abbie Llewellyn-Waters

In this episode of the Pensions for Purpose Podcast Karen Shackleton, Chair & Founder, talks with Abbie Llewellyn-Waters, Lead Investment Manager of Jupiter’s Global Sustainable Equities strategy, about how diversity, equity and inclusion (DE&I) help managers to select companies with the best long-term prospects. In a recent Pensions for Purpose Impact Lens report, sponsored by Jupiter Asset Management, the two organisations looked at the importance of DE&I factors across the investment chain. The podcast discusses practical steps pension schemes and asset managers can implement.

Transcript

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Charlotte Moore: Hi, welcome to the latest edition of the Pensions for Purpose Podcast. 

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Charlotte Moore: I'm Charlotte Moore, and your host. 

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Charlotte Moore: I'm delighted to welcome Karen Shackleton, Founder of Pensions for Purpose, back to the show. 

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Charlotte Moore: Hello, Karen! 

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Karen Shackleton: Well, Hello! It's really nice to be here again, Charlotte. 

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Charlotte Moore: We’re both delighted to welcome Abbie Llewellyn-Waters, 

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Charlotte Moore: Lead Investment Manager of Jupiter's Global Sustainable Equity strategy to the show, 

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Charlotte Moore: welcome Abbie. 

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Abbie Llewellyn-Waters: Good morning, thanks for having me. 

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Charlotte Moore: Today, we're going to discuss a report that's recently been co-produced by Pensions for Purpose and Jupiter, which takes a deep dive into the importance of diversity, equity, and inclusion (DE&I). 

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Charlotte Moore: Abbie, can you tell us what motivated Jupiter to carry out this research? 

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Charlotte Moore: Why is DE&I an important issue for the investment chain? 

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Abbie Llewellyn-Waters: Yeah, there's several reasons why it was important for us to contribute to this initiative. 

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Abbie Llewellyn-Waters: Firstly, I think we have very strong philosophical alignment with Pensions for Purpose in the context of balance of stakeholder outcomes. 

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Abbie Llewellyn-Waters: So you mentioned in your introduction that I manage a Global Sustainable Equity strategy. 

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Abbie Llewellyn-Waters: The investment philosophy of that strategy is to invest in high-quality companies leading the transition to a more sustainable economy, 

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Abbie Llewellyn-Waters: and we define high-quality by those companies, who balance the need of three-core stakeholders being: 

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Abbie Llewellyn-Waters: planet, on which we all depend, people, with whom we all coexist, and the profit that we all require from our long term savings. 

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Abbie Llewellyn-Waters: On that basis, 

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Abbie Llewellyn-Waters: we felt it was a really important piece of research that covered across the value chain from asset owners, investment consultants and investment managers, where we can come together and start to effect meaningful action on addressing some of the social inequality that we see across the global economy. 

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Charlotte Moore: Karen, can you summarise the key findings of the report for us? 

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Karen Shackleton: It was a fascinating piece of research, and we decided to look at DE&I with three different lenses. First of all, DE&I in an asset owner's own organisation. 

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Karen Shackleton: Second, was DE&I in their procurement of third-party providers. So, in other words, asset managers, investment consultants, and so on. The third lens, which is probably the one we'll want to explore most today, was looking at DE&I in the underlying investments. How did asset owners think about that? What were they doing to engage and challenge on DE&I? 

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Karen Shackleton: To give you some headlines on the key findings in terms of their own organisations, what we found was that DE&I is actually an emerging theme. Most funds hadn't really started thinking about DE&I until the early 2020s. There were a few that had begun earlier. But most for of them it's a fairly recent thing they've started to focus on. 

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Karen Shackleton: Those who had adopted it fairly early, what we found was they had good governance and sustainability policies in place, 

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Karen Shackleton: and those who were developing their process were focusing on age, gender and background for their committees. 

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Karen Shackleton: In terms of third-party procurement, they were mostly asking about DE&I when they went into a procurement exercise to find an asset manager, or a consultant, or a lawyer. 

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Karen Shackleton: However, a third emphasised the importance of policies, and that was something that they looked for in organisations. 

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Karen Shackleton: Something like 40% were including questions specifically on DE&I in their documents. 

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Karen Shackleton: Finally, looking at the lens of investment, I think this is one of the more interesting findings of the research, because what we found was that most weren't really giving this a lot of thought. Around 40% did consider it in voting and engagement, particularly with, for example, women on boards. 

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Karen Shackleton: Sixty percent of asset owners did ask their asset managers on how they integrated DE&I in their ESG policy, but we didn't have anybody who was consciously directing investments towards DE&I themes. 

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Karen Shackleton: Fascinating research! 

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Charlotte Moore: When you said at the beginning there you found most funds weren't really focusing on this until the 2020s. By funds, do you mean the pension funds, or do you mean the asset managers? 

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Karen Shackleton: No, I mean the pension funds. 

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Charlotte Moore: Do you think the asset managers have been looking at this issue for longer than the asset owners? Or is it both parties that only just started to look at these issues? 

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Karen Shackleton: I think some managers have been thinking about this for a long time, and Abbie is one of those managers, who I think, has been very consciously focused towards DE&I. For many they are client driven and it's not until the asset owner starts pushing them to answer questions about a particular topic, that they will be responsive. 

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Charlotte Moore: Abbie, if we can turn to you, can we take a deeper dive into why asset managers should be thinking about these issues when they're selecting investments? 

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Abbie Llewellyn-Waters: Yeah, for context I come to this narrative very much from a bottom-up, stock-picking perspective. 

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Abbie Llewellyn-Waters: I run a concentrated portfolio of around 35 companies out of investable universe of 8,000. That gives us a 95% active share. 

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Abbie Llewellyn-Waters: So very high conviction, concentrated stock-picking approach. We spend weeks and months researching companies when we're looking into our long-term view, particularly because we have a 10-year investment horizon. 

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Abbie Llewellyn-Waters: So, given the length of our investment horizon with which we anticipate to invest in an issuer. 

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Abbie Llewellyn-Waters: We really like to understand the business, we like to understand the economic sustainability, the planetary boundaries 

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Abbie Llewellyn-Waters: of the operational and product and service revenue of the company, but also to the point of this podcast: 

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Abbie Llewellyn-Waters: the social aspect of it, particularly on a DE&I basis. The reason that we do that 

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Abbie Llewellyn-Waters: is we see a strong 

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Abbie Llewellyn-Waters: correlation 

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Abbie Llewellyn-Waters: between leading human-capital policies 

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Abbie Llewellyn-Waters: at a company level, 

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Abbie Llewellyn-Waters: which support a more inclusive economic construct. 

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Abbie Llewellyn-Waters: We see a strong correlation with those policies, and what we would describe as operational excellence. 

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Abbie Llewellyn-Waters: We've described it as a proxy for operational excellence 

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Abbie Llewellyn-Waters: when allocating capital, we think about it in the context of what a company sells 

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Abbie Llewellyn-Waters: and where it sells it. So, sector and region, and that's a really important point. Maybe we can get further into that later on. 

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Abbie Llewellyn-Waters: I think some of these things come best alive when we talk about tangible examples. So, for instance we have a financial services software provider. That's a US domestic equity, it's about $14bn market cap. 

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Abbie Llewellyn-Waters: This company 

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Abbie Llewellyn-Waters: has extraordinary 

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Abbie Llewellyn-Waters: customer retention. 

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Abbie Llewellyn-Waters: So 97% of its customers stay with it. 

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Abbie Llewellyn-Waters: Ninety percent of its revenue is recurring, 

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Abbie Llewellyn-Waters: and because it's a service business, 

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Abbie Llewellyn-Waters: we spent a huge amount of time on the correlation, looking at 

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Abbie Llewellyn-Waters: the strength of their human-capital policies, 

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Abbie Llewellyn-Waters: because employee loyalty and productivity lead to better customer retention, higher recurring revenue 

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Abbie Llewellyn-Waters: goes to the heart of the capital growth objective, the vast majority of public equity investors would be seeking to achieve. 

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Abbie Llewellyn-Waters: You'll notice, I've chosen my words relatively, carefully, because 

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Abbie Llewellyn-Waters: we can't talk about causation 

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Abbie Llewellyn-Waters: in that example. But we can talk about correlation: 

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Abbie Llewellyn-Waters: high-employee satisfaction, high-customer retention, high-recurring revenue. So looking at these issues becomes a fundamental component of our capital growth, objective in our view. 

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Abbie Llewellyn-Waters: That is a view that we've held for a long time. I think from that perspective, 

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Abbie Llewellyn-Waters: that was one specific example relating to a services business, where 

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Abbie Llewellyn-Waters: employee training, employee, loyalty, low-employee, turnover, is absolutely fundamental to customer satisfaction. There are other examples that we can dive into in terms of tools that we can consider in the context of products and services, and different alignments. So let me know when you'd like to jump into those. 

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Charlotte Moore: I think that's a really fascinating point that you made about 

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Charlotte Moore: operational excellence. 

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Charlotte Moore: and about being able to actually run your business to the best that it can possibly be. It touches on issues that we discussed in another podcast with the Maturity Institute, who does a whole lot of research and looks at whether companies are too focused on accounting measures alone. 

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Charlotte Moore: Just see their workforce as a cost base and end up getting rid of a lot of people and then finding hard to grow once the cycle has turned. I think it's fascinating the way you're echoing on a previous podcast that we've had. 

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Abbie Llewellyn-Waters: That is really interesting, because what I didn't mention in that preamble was that specific company chose not to reduce headcount in times where you see financial servicing, capital expenditure (capex) being cut back as a capex being retracted from their customer base. They chose not 

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Abbie Llewellyn-Waters: to cut headcount, because their training cycle on their software service platform can be, anything depending on the software, between six weeks and 18 months for the more complex platforms, which perhaps some of the listeners will be familiar with in the context of trading platforms within financial services. 

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Abbie Llewellyn-Waters: That was fascinating. Because then of course, when the capital expenditure budgets returned 

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Abbie Llewellyn-Waters: post-economic decline 

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Abbie Llewellyn-Waters: they were ready to go. 

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Abbie Llewellyn-Waters: It meant that took both market share and had pricing power. It's really interesting you raise that point because that's exactly what we saw in that specific stock example. 

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Charlotte Moore: I think that leads us nicely into discussion about of risk and return, and also how it fits with the asset managers’ fiduciary duty. So, if you could maybe address that first part about risk and return, then we can move on to fiduciary duty? Why this consideration of this DE&I factors feeds into that. 

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Abbie Llewellyn-Waters: Yeah, there is a big discussion on fiduciary duty and how it factors into it. We take a pragmatic approach on balance. 

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Abbie Llewellyn-Waters: Can we see 

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Abbie Llewellyn-Waters: a company being an attractive high-conviction investment opportunity based on the three pillars that we described at the beginning: planet, people and profits. 

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Abbie Llewellyn-Waters: Depending on the company, depending on the service, the sector, the region 

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Abbie Llewellyn-Waters: we are considering. We would look at that in the context of balance, because it's difficult to compare a Japanese company to a Swedish company, to a Brazilian company. 

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Abbie Llewellyn-Waters: There are different considerations you have to bring into your thinking on a conviction basis 

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Abbie Llewellyn-Waters: that allows those regions to be investable 

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Abbie Llewellyn-Waters: on a global basis, 

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Abbie Llewellyn-Waters: because it's challenging 

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Abbie Llewellyn-Waters: to apply an aggregated-global standard 

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Abbie Llewellyn-Waters: to a global-investment strategy, 

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Abbie Llewellyn-Waters: because of the regional nuance that we've just described. 

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Abbie Llewellyn-Waters: I think from that perspective, you have to be careful about achieving your capital growth and your fiduciary duty to your clients. While balancing these outcomes, for us, our clients have an explicit desire to deliver positive, environmental and social, real-world outcomes. So for a strategy like ours, 

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Abbie Llewellyn-Waters: it's aligned and easy for us to achieve that in the context of our investment framework, because we aggregate that, and actively bring that in to our fiduciary duty. However, at a broader level, and Karen can speak on this in great detail and with great authority. 

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Abbie Llewellyn-Waters: The broader mix of defining fiduciary duty in the context of these considerations is something that's complex. Karen, I don't know if you want to expand on that? 

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Charlotte Moore: Let's talk about that and some of the challenges asset owners face when they want to start to integrate these DE&I factors. 

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Karen Shackleton: The way we work with pension funds when we're helping them to think about their investment beliefs is to encourage them to think about their 

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Karen Shackleton: preferences, their priorities, what they want to focus on in their funds, but to have that underpinned by an investment thesis. 

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Karen Shackleton: If you're going to go for gender diversity, as one of your priorities, one of your beliefs, make sure you have a firm investment, thesis underpinning that. Of course for diversity that would be around better governance: ultimately leading to better growth in a company. So I think it's a question about informing trustees of 

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Karen Shackleton: how to go about thinking about DE&I, and always bringing it back to their fiduciary duty, and say this is part of your decision about getting best value out of your investments. 

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Karen Shackleton: Some of the challenges they faced, I think they were mainly around getting the data that they wanted. We asked them what lenses are you prioritising. Nearly all of them said it was around gender and ethnicity. Some of them talked about social background, but mostly it was around gender and ethnicity. So we then said what about things like neurodiversity? 

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Karen Shackleton: What about disability? And they said it was difficult to ask about those topics with their staff and with their managers, as the lack of available data meant that they weren't really able to push on this, although I think, in principle they wanted to. 

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Karen Shackleton: So that to me was the main hurdle we need to overcome is just getting an openness about talking about things like disability, knowing which questions we should be asking, making it an acceptable topic, so we can move the industry on and see organisations accommodating disability in their staff and workforce. 

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Charlotte Moore: I'm aware for the asset owners there's a lot that they need to be doing. It's about their own organisations and it's about the intermediaries as well. It's about the consultants they work with. It's about the asset managers they select. So there is quite a lot of information and data that needs to be gone through, isn't there, Karen? 

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Karen Shackleton: There definitely is and many of them were delegating a responsibility on things like DE&I data to their investment consultants to ask from their manager, and their managers of course are being asked for that data on the underlying investments. 

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Karen Shackleton: Pension funds are often tightly resourced in terms of what they can do. So I think that's perfectly acceptable. But then you have to think of ok, how am I going to challenge my investment consultant? How am I going to challenge my manager to make sure they're keeping on top of this topic? 

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Charlotte Moore: That in itself requires more resource. 

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Karen Shackleton: Yes, it does, but I think you can with careful targeted questioning and you can get the information that you need. I mean, I always want to see progress being made. Not just taking a snapshot and saying yes we've made sure these companies have policies in place. But ok, let's see the improvement year-on-year. 

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Charlotte Moore: Ok and Abbie, I mean for you, what are the challenges for asset managers? In a way, 

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Charlotte Moore: if you're running such a concentrated portfolio - does that make it easier, or harder that you only have to focus on 35 companies? Of course you have to screen the whole universe. If you were running a passive investment portfolio it would be a different challenge. 

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Abbie Llewellyn-Waters: For sure on the latter point. Very different. Karen's already alluded to it, it’s data right?! Data is the bottleneck here and we invest and we've bought data sets. 

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Abbie Llewellyn-Waters: We have stripped them out because what you typically find in the world of 

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Abbie Llewellyn-Waters: ESG data is 

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Abbie Llewellyn-Waters: the third-party providers typically lean to a scoring mechanism, 

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Abbie Llewellyn-Waters: which is a fairly blunt tool in our view, because of the nuance, the regional aspect etc, to just aggregate into a single school. We find that challenging 

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Abbie Llewellyn-Waters: from a conviction enhancing perspective. So, we buy these data sets and we work with our internal data-engineering, and data-science teams, to strip those back and get to the core understanding of some of the dynamics in these companies: things like remuneration linked-DE&I targets are absolutely critical. 

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Abbie Llewellyn-Waters: I think, we talked about this in the report on the context of multiple, social-impact multipliers, but also economic outcome and half the world's population having 

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Abbie Llewellyn-Waters: supported better, enhanced-economic participation is clearly a net positive for the global economy. When we're thinking about these things and thinking about that impact multiplication. 

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Abbie Llewellyn-Waters: We're looking at things like remuneration-linked DE&I, we look at aspects, like parental leave, 

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Abbie Llewellyn-Waters: particularly paternity leave, and paternity-leave participation rates, getting that data on a global basis is really challenging. 

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Abbie Llewellyn-Waters: Engagement is a key tool in the kit we leverage a lot when actually speaking to the companies, when trying to understand them. But as you pointed to, that is a time process. It's a stock knowledge process. But it's also a research outcome that's critical to the conviction enhancements of an investment opportunity on a 10-year forward basis. So time well spent doing these things, but it's not without challenge. 

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Charlotte Moore: Yes, and I appreciate that there is a lot of data that needs to be gone through. Could you, given the sort of the size of the challenge. Could you Abbie, maybe share your top tips for what asset managers could be doing if they want to embrace this process into their investment process and selection? 

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Abbie Llewellyn-Waters: Yeah, I think there is some really high-level commitments or baselines that managers could think about in the context of better integration of DE&I. So for us the starting point would be commitment to the UN Global Compact. 

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Abbie Llewellyn-Waters: That is a baseline of 10 guiding principles largely focused on 

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Abbie Llewellyn-Waters: human capital and human outcomes, 

00:20:39.750 --> 00:20:47.380 

Abbie Llewellyn-Waters: in the context of exploitation and corruption. Looking at that as a commitment would be a 

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Abbie Llewellyn-Waters: low-bar. I think, the asset managers would do well to consider. We also have the UN sustainable development goals, which have a target date of 2030, 

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Abbie Llewellyn-Waters: that is just around the corner in investment terms. 

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Abbie Llewellyn-Waters: We need to accelerate the delivery of those goals. I think from a capital-markets perspective, there is a huge opportunity to consider the products and services of a company, in the context of the alignment to that framework, but also the behavioural aspects. We have several goals that sit within 

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Abbie Llewellyn-Waters: the focus of this podcast on a DE&I basis. We have gender equality and reduced inequalities that we could consider. 

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Abbie Llewellyn-Waters: I was just going to have a quick look at the portal. I think we talked about the IMF study that looked at increased female participation in the global economy. 

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Abbie Llewellyn-Waters: I think it was the bottom-half countries in the sample in terms of gender inequality, if they had better economic participation could increase global gross domestic produce(GDP) by an average of 35%. 

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Charlotte Moore: Wow! That's a big number! 

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Abbie Llewellyn-Waters: It's a big number! 

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Abbie Llewellyn-Waters: If we think about this in the context of putting that capital markets to work and committing to these goals and thinking about the operational approach of human-capital policies within a corporate issuers 

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Abbie Llewellyn-Waters: commitment, but also the products and services they sell. The other two aspects I just wanted to highlight would be living-wage commitments - consider those. We have a fast-moving consumer goods company, in the portfolio, which is a global company 

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Abbie Llewellyn-Waters: and they made a commitment to pay all of their tier-one suppliers 

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Abbie Llewellyn-Waters: a living wage. If you think about the social impact of that to rural communities working 

00:22:54.370 --> 00:23:00.300 

Abbie Llewellyn-Waters: as a tier-one supplier to these companies that has significant real-world outcome 

00:23:00.550 --> 00:23:02.289 

Abbie Llewellyn-Waters: in the context 

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Abbie Llewellyn-Waters: of capital allocation. So asking these questions, engaging on these questions of engagement, and working with companies to make sure they 

00:23:14.770 --> 00:23:29.310 

Abbie Llewellyn-Waters: are achieving best practice. As investors, we can act as agents for positive change through stewardship, encouraging those companies to adopt a better practice, but also 

00:23:30.080 --> 00:23:40.040 

Abbie Llewellyn-Waters: to be regionally aware, having those conversations. So you have realistic and pragmatic outcomes in the context of those engagement targets. 

00:23:40.920 --> 00:23:56.100 

Charlotte Moore: Karen, what about you from the asset owners perspective? Are there some top tips you have for them? If they want to embrace the DE&I agenda and embed it into their process, not only within their own organisation, but also when they're selecting their intermediaries? 

00:23:57.370 --> 00:24:23.309 

Karen Shackleton: Well, we've highlighted in the research some best practice examples of what other asset owners are doing. So I think a starting point would be to go and have a read of those, because there's some great suggestions, thinking about the governance structure, making use of things like the Diversity Project’s, Asset Owner Diversity Charter questionnaire for third-party providers as a good tool to use and just bringing it on to trustee agendas. 

00:24:23.310 --> 00:24:37.549 

Karen Shackleton: It doesn't need to be every quarter, but have it as a standing item, perhaps once a year to really do a deep dive. Think about DE&I on your own committees, DE&I in the third-party providers and DE&I in the underlying investments. 

00:24:39.010 --> 00:25:03.420 

Charlotte Moore: We've managed to cover a lot of material in a short amount of time, which I'm not surprised by given the calibre of my guests on this show. Just to conclude, I'd like to ask you both, what would your  takeaway be? What do you want listeners to have embedded in the forefront of their mind, right there in their frontal cortex when they've finished listening to this podcast? Would you like to go first Abbie? 

00:25:08.380 --> 00:25:11.450 

Abbie Llewellyn-Waters: We have tools available to us – 

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Abbie Llewellyn-Waters: let's use them! 

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Charlotte Moore: That's nice and pithy. I love that! How about you, Karen? 

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Karen Shackleton: I think the thing that struck me as we were talking. The thing I think trustees need to take away from this is, as Abbie has conveyed so coherently, how important this is in terms of the underlying investments 

00:25:32.640 --> 00:25:47.019 

Karen Shackleton: and the research identified that perhaps that wasn't being given sufficient focus. So, let's think about DE&I and our underlying investments. What does that look like? What do we want it to look like? And how are we going to monitor and challenge it over time? 

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Charlotte Moore: I know that I don't really get a key takeaway, but I'm going to give one anyway. I was really struck Abbie, by what you said about your case study of the software company, about how looking after their employees, nurturing that environment, helped them to nurture their clients and helped them to nurture the bottom line. How that 

00:26:06.080 --> 00:26:31.919 

Charlotte Moore: absolutely resonates with the earlier podcast we did with the Maturity Institute. It's about being emotionally intelligent about how you manage your human capital and not always having a treasury brain and being driven by the bottom line. I think that's a really important takeaway a way for people who think this is sort of light and fluffy and woke and progressive. To think about it as though this actually has a real-world profit impact. 

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Charlotte Moore: What a great podcast, thank you both for all of your insights. It's been wonderful to talk to you. 

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Charlotte Moore: Listeners, if you want to make sure you never miss an episode. Then do click the follow button. Thank you both, and thanks for listening.