Traditional due diligence and risk assessment in the financial industry has overwhelmingly excluded the BIPOC (Black, Indigenous, People of Color) community. Research shows White, male asset managers control a staggering 98.7% of the investment industry’s $69 trillion in assets under management. Abacus believes that to make meaningful changes in society’s pressing need to reduce systemic racial inequities in education, employment, and healthcare, among many others, it is essential to increase access to financial markets going forward. The asset owner’s and advisor’s most impactful potential contribution is to allocate more capital to BIPOC managers, communities, entrepreneurs, and stakeholders, and Abacus is pleased to announce its participation in the Due Diligence 2.0 Commitment (DD 2.0).
How Did the Due Diligence 2.0 Commitment Come About?
In early 2020, Abacus CEO Brent Kessel was talking with Rachel Robasciotti (at the time of Robasciotti & Philipson, who has recently merged with Abacus) about Rachel’s social justice public stock investment strategy. Rachel outlined for Brent how traditional due diligence and risk assessment routinely excludes the BIPOC community. As one small example, she described how when traditional, multi-billion dollar managers consider a prospective BIPOC firm for investment management, the big firms often ask, “How much do you have in assets under management? $250 million? A billion?” When the answer is insufficient (because BIPOC firms have historically lower assets under management), the companies essentially say, “Sorry, you’re too narrow, too small, we’re not going to be able to do anything with this.” Rachel told Brent when that happens, “Capital is going to stay in the hands of those who have the capital today – White men.”
For Brent, this was an eye-opening wake up call. He realized the investment advisory profession was essentially, for all practical purposes, failing to include non-White investment managers. Rachel described to him the frustration of diverse managers of color who routinely hit these barriers and the need to reshape the paradigm. Brent also realized that without changing the system, the system was not likely to change on its own. After further educating himself (including getting respectfully ‘called out’ on a panel by three Black, female managers) Brent came to the conclusion, “Companies like ours are the ones who have to take an anti-racist stance because we are the ones with the power to make asset allocation decisions.” And so the genesis of the Due Diligence 2.0 Commitment was born.
Blending the Personal and the Political
It’s one thing to have a personal interest in something but quite another to build consensus in the business community. Brent notes, “Initially, I spearheaded this from a personal values standpoint but I certainly wanted Abacus to take this to heart and implement it. It’s very empty for me to just write something and put it out to the industry without backing it up. So I shared it with the Abacus Investment Committee and we had some really good discussions about it. There were some challenging debates with some voices saying, ‘But we’re fiduciaries. We have to do what’s best for our clients irrespective of race.’ And there were other voices saying the data shows that diverse managers financially perform as well as or better than traditional (read: White and male) managers.”
With key input from several dozen diverse managers who read initial drafts of the commitment, the Abacus Investment Committee ultimately agreed to reform their traditional due diligence questionnaire (“DDQ 2.0”). The DDQ 2.0 now includes questions for companies about their current and future plans for diversity, what type of focus there is on the products and services of their underlying investments, and whom do they benefit and/or harm?
Why Does the Industry Need This?
There are many different answers to this question. From Brent’s perspective, “First, there’s the answer of equity. If 40% of the American population is non-White but only 1.3% of the financial capital is controlled by non-White managers, there is a clear disconnect in accurate representation in the finance community. Research also shows diverse perspectives and diverse backgrounds yield better results, whether you’re looking at education, healthcare, or finance. So we need to do it because it’ll actually produce equal or better financial returns for our end users, who are our clients, the people who trust us to invest their money.”
“On an even bigger scale, our society needs to do it because where capital gets allocated is largely a function of the backgrounds and perspectives of those doing the allocating. And so if you don’t have Black and Brown people sitting in those allocation seats, the beneficiaries of capital are largely not going to be Black and Brown which contributes to the racial wealth gap and other problematic outcomes. And so my hope is that Abacus, along with other large investment advisors, foundations, and pension funds like us who do this work, will appear on everybody’s radar and we’ll all see better results industry-wide.”
Brent also believes that on a humanistic level, the unbelievable stories of strength and resiliency he has encountered on this new journey should instill confidence in diverse managers as a whole. “When you’re looking around the financial services industry at who holds the keys to allocating, why wouldn’t you want to include as proactively as possible populations of people who have demonstrated the ability to overcome systemic obstacles? Those are the same skills you need in terms of someone sticking with it when the going gets rough, which it always does at some point in one’s investing journey.”
Short and Long-Term Hopes
For Abacus, the long-term hope is having a representational, multi-pronged approach to investing capital into the hands of people who look like America. As Brent notes, “Let’s recognize we have a completely stilted system now, and it’s not meritorious. I mean, you can’t tell me that White males are just so much better at allocating capital that we should get to do 98.7% of it. That’s just impossible to believe. So that’s my long term hope. My short term hope is this isn’t just some kind of a fad or season, that this isn’t kind of a boomerang effect that will have faded from view by 2023.”
“I’d like to see Abacus’ and similar firms’ Investment Committees put the work in and look outside of the usual suspects to find managers, evaluate them in these alternative ways, which does take extra work. But what I really hope is that we as an industry share our best practices, share our successes. For example, if someone figures out a way to say, ‘Instead of looking at assets under management, we looked at this other way of assessing organizational stability and in many ways it gave us better information about how well this manager was going to do going forward. Why don’t you all try this?’ I would love to see that.”
How Can Other Firms Take Action Beyond Signing the Pledge?
For Abacus, it starts with not being hesitant anymore. Hesitancy is both normal and natural. The industry has been trained to be skeptical. A good investment committee member is supposed to see risk everywhere and do everything to avoid it. This has been a kind of training or bias, however, and should be recognized as bias. Because if taken too far, it’s easy to go really conservative on all choices. So that must be balanced with the need to provide returns on the capital, which in Abacus’ case includes both financial and social returns.
Brent also reminds other asset owners and advisors, “For folks who are reticent to take action, this is a non-binding commitment. It has the word commitment in it, but it’s a commitment to look at the problem, look at your own organization, and change what you can at the pace you can. There’s nothing here about how we’re going to guarantee X percent of capital allocation to minority managers by X date. So sign it and then take whatever steps you can. Yes, it will be harder work than what you otherwise would’ve had to do. But I believe if you look at the demographics of where capital is and where it’s heading in terms of the Millennials, the Gen Zs, there are generations of people who are insisting on this and they’re about to be your target clients and best talent. So if you want your organization to have financial sustainability, you’re going to have to address this at some point. So do you want to be a leader or do you want to be a follower?”
Besides signing the commitment, Abacus also recommends talking to diverse managers, asking them about their best experiences with Investment Committees or with allocators. See if there are ways to emulate and use the Due Diligence Questionnaire 2.0, which will be available for download on duediligencecommitment.com shortly. Use that or incorporate some of those questions in your own proprietary DDQ. Brent adds, “And my recommendation would be, don’t just use this for diverse managers, use this for all managers. Collect the information – even some of our largest, longest term, most traditional managers have diversity in their teams. How many women are running portfolios for you? How many people of color? Are the decisions being made in a group format or by a single portfolio manager? Just by asking these questions, we’ll put the manager’s attention on this issue.”
Finally, Brent recommends reading the research. “Go look at the research about financial returns from diverse managers. There’s lots of research in education and healthcare and other fields about how diversity yields better results, so go find that. And, you know, there’s counter research so go find that as well and make up your mind about what you believe is true. And then invest the time accordingly.”
One Last Thought
Brent remembers something recently said to him that has stuck: “Rachel said to me, and to one of Abacus’ largest clients on a joint call, ‘The most important thing you can do is not be on this journey alone. There are other people who are doing what you’re aspiring to do, join them.’ And then one of the other things she said that I thought it was really cool: ‘Wealth specifically pulls us out of community. Because if people know how wealthy you are, they’re going to want you for your money.’ So in general, wealth makes people pull away from community and what we really need to heal all these issues is to call people in rather than call people out. And that’s what I hope the commitment is doing: it’s not making people wrong for doing it an old way, but inviting ourselves and our colleagues to join in at whatever pace and in whatever ways we can.”