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Putting Values into Action: A Practical Guide for Institutional Investors

Putting Values into Action: A Practical Guide for Institutional Investors
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3 min 30 sec

Many institutional investors are becoming more active in emphasizing values-oriented investments. This can take several forms, but whatever the approach, it requires a deliberate and thoughtful process for successful implementation. In this post we highlight how organizations can help address one such value, in this case racial equity, in their investment programs.

Investors that hold racial equity as one of their priorities should evaluate their options in terms of how that value will be implemented. To start, investors should identify their goals and determine their priorities. The culmination of this effort should be a clearly articulated guiding principle that is incorporated into the investment policy statement. This will confirm that all stakeholders are clear on the objectives and share reasonable expectations for developing and implementing an investment program that can successfully make the desired positive changes regarding racial equity.

To incorporate specific objectives into the investment process, the investor should begin by answering two key questions:

  1. How does the investor define racial equity?
  2. Does the investor want to focus on specific underrepresented communities when it comes to racial equity?

Next, the investor should evaluate the different areas in which it may have an opportunity to make an impact and gauge its priorities and preferences.

  • Targeted investments: These could include housing initiatives or broader community development. Are there geographic restrictions?
  • Hiring diverse management firms: The investor should decide if the firm must be majority owned by underrepresented groups, or whether it would be acceptable if a firm that is not diverse-owned is taking steps to increase its diversity. Are there specific preferences for levels of ownership, broad employee diversity, management diversity, or other criteria?
  • Cost: Some diverse-owned firms may be in a nascent stage requiring more resources and attention from staff. Does the institutional investor have the support to do adequate due diligence?
  • Risk: If the diverse-owned firm is new with a smaller starting asset base, a typical institutional allocation may represent a high percentage of total firm or total strategy assets. But if the investor is willing to lower the required assets under management threshold for managers, the universe of diverse candidates broadens significantly. Is the investor willing to take on these inherent risks?
  • Defining success: Investment strategies require long-term holding periods to evaluate success; there may be short-term periods in which relative performance varies widely. Diverse-owned firms, if in a nascent stage, may need additional time to build a robust business as well. Some successes may be hard to measure using traditional metrics. Does the investor have the tolerance for short-term performance volatility and the absence of hard data to measure success?

In our consulting work, Callan has learned a great deal over the years about the process of defining and implementing principles such as racial equity into the investing process:

  • Detailed objectives are optimal, along with an order of priority. If a goal is too broad, stakeholders may often believe they are not achieving it. If a goal is too narrowly defined, there may be insufficient numbers of opportunities available to put it into action.
  • Implementing a mission takes a great deal of effort. A good example is in the diverse-owned investment management space. Some organizations have diverse ownership, but the organization may lack true diversity, with the benefits of ownership primarily accruing to one or a small number of individuals without providing opportunities for inclusion across the broader firm.
  • Typical search criteria often exclude emerging diverse-owned strategies. When clients establish minimum levels of assets under management at the firm or strategy level, emerging firms are often excluded. The solution is to draft parameters that are as inclusionary as possible for the investor’s levels of acceptable risk.
  • Evaluating success takes work. The usual benchmarks may not be as meaningful and the “returns” may not show up in a quarterly performance report.

Incorporating values such as racial equity into investment programs is a worthy goal for many institutional investors. But doing so requires more than a simple statement or declaration. Instead, it demands a thoughtful process and determined effort by many of the investors’ stakeholders in order to achieve success. Our experience is that the hard work which goes into the process more often produces successful outcomes for the investor, for the institutional investing industry, and for beneficiaries.

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