The May 25 death of George Floyd, an unarmed black American, at the hands of police has triggered one of the greatest civil uprisings of modern history, sparking protests in cities across the US and around the globe. In the corporate world, these recent events have pushed conversations around diversity and inclusion to the forefront.
While having a diversity and inclusion strategy is nothing new in private real estate, the issue has become a greater priority for many investors in light of the recent protests against racial injustice.
Within the first two weeks of protests, Alisa Mall, managing director of investments at Carnegie Corporation of New York, says four of the philanthropic foundation’s existing investment managers – two of which were in real estate – expressed an interest in prioritizing diversity and inclusion and sought to pursue new ways to do so.
“It’s definitely been elevated on people’s agendas and taking up more mindshare than maybe it was previously,” Mall tells sister publication PERE. “It remains to be seen whether or not the increased attention translates into different outcomes. But I do think people are thinking about it in a more meaningful, authentic way.”
Meanwhile, Cambridge Associates’ chief executive David Druley notes the protests have “without a doubt” made promoting diversity more of a priority at his firm. It already had various initiatives in place prior to the protests, such as having external recruitment and internship partnerships with various non-profit organizations, such as Girls Who Invest and Sponsors for Educational Opportunity, to increase the pipeline of diverse candidates.
Since the protests, however, Cambridge has introduced further measures, including having every member of its leadership team take a pledge to insist on a diverse slate of candidates for every open job in their respective groups. In addition, the firm is looking to select an external expert to review its current diversity and inclusion strategy.
Other investors say the protests have not spurred any specific changes to their diversity and inclusion policy but instead have reaffirmed the importance of fighting racism and discrimination at their organizations. Angela May-Miller, chief investment officer at Chicago Teachers’ Pension Fund, explains: “What the protests have done is strengthen CTPF’s resolve and heighten our goals to promote and encourage diversity and inclusion. I know a positive change has to come from these events.”
She stresses that everyone is a beneficiary of increased diversity and inclusion. “The protests, which included a diverse mix of people, served to reinforce or validate CTPF’s beliefs that diversity and inclusion are important to everyone, not just one select group or one minority.”
While CTPF has not introduced any new measures since the protests, since 1990 the investor has been committed to promoting diversity among its employees, vendors and its investment managers, starting from the top down. Within CTPF’s senior leadership team, eight out of 10 members are women, comprising five African American women and one Asian-American woman.
“I try to use the platform that I have as being chief investment officer of a $10 billion pension fund to push for more equality and diversity in the investment industry,” Miller-May tells PERE. “You can’t, as one person, change the world. But you can change ‘your’ world, and if every person strives to do this, the world as a result will change.”
Anthony Breault, senior real estate investment officer at Oregon State Treasury, adds: “The protests have not so much reprioritized our [environmental, social and governance] goals – particularly diversity and inclusion – as much as reinforced that we were going down the correct road.” He notes that Oregon hired a dedicated ESG investment officer a few years ago to address the diversity makeup among the pension’s own investment teams.
Even before the protests, some real estate investors were assessing both existing and potential managers on not just their returns potential but on their levels of diversity.
Carnegie, for instance, has categorically pledged to add diversity to its roster of investment managers, with diversity meaning non-white or non-male professionals in decision-making roles.
“We’ve made a commitment that we are not adding a new name to the portfolio unless there is a meaningful diversity component,” says Mall. “This is no matter how strong the investment opportunity is.”
In order to assess a manager’s diversity make-up, Mall reveals this year Carnegie implemented a new metric scoring system for grading existing managers from a score of one to three, with three being the highest. While low-scoring managers will not necessarily be terminated, managers that score a one or a two should expect a discussion with Carnegie about how diversity and inclusion can be advanced in their organization.
As of June 30, 2019, CTPF had invested 44 percent of its total assets with minority, women and disadvantaged business enterprises, exceeding the 20 percent threshold stipulated in the state of Illinois’ pension code.
To achieve this high level of MWDBE exposure, CTPF’s request for proposals process includes an assessment of the manager’s diversity composition. Managers must provide, on an annual basis, the number of minorities at the firm and what positions they are in.
“We want to see diversity at both the portfolio-manager level and the director-manager level because these are the people who are making the critical investment decisions,” says Miller-May.
While Breault says that Oregon does assess diversity when underwriting new managers, the pension plan is currently in the process of incorporating various ESG principles into its due diligence on managers and is exploring the use of grading criteria, heat maps or more qualitative assessments.
“This is work in progress and will be improved over time as we gain repetitions in our underwriting while collecting data from our partners and prospective partners,” says Breault.
He did stress, however, that “any exclusionary signals or resistance to incorporating diversity into their daily practices are an immediate red flag.”
Just 16 percent of executive managers are women and 6 percent are non-white, according to NAREIM’s 2019 Diversity & Inclusion Report. Yet 86 percent of survey respondents in Deloitte’s 2019 Commercial Real Estate Outlook believe that diversity on the boards of commercial real estate firms leads to better returns.
Druley agrees that the benefits of promoting diversity extend beyond simply ‘doing good’: “There is conclusive evidence that surfacing diverse viewpoints leads to better decisions and better financial outcomes.” In fact, 39 percent of diverse managers are in the top quartile of performance, according to Cambridge research.
“At the end of the day, investors are seeking performance and to outperform peers,” says Mall. “Fundamentally, it’s a for-profit industry and those people need to buy into the fact that diversity matters, not just for the sake of diversity but because ultimately it should lead to better outcomes.”
She points out, however, that many investors have an implicit bias and turn away emerging firms that are launching first-time funds and do reflect diversity. “There is a tendency to employ shortcuts to facilitate underwriting and minimize one’s own career risk, such as investing with well-known and established firms,” says Mall. “This makes it harder for emerging managers to gain traction.”
While some investors may shy away from the perceived risk of investing with an emerging but diverse firm, institutions like Carnegie are willing to prioritize diversity over the “safe bet.” Mall notes “we are much more likely to engage with a firm that has some diversity rather than one that does not.”
As the protests throw a spotlight on diversity and inclusion, she is far from the only investor with that sentiment.