Morgan Stanley Survey: Pension Funds Are Leading the Way in Diversity-Based Investments, Yet Perceived Financial Trade-Off Creates Hurdles for Many Asset Owners

October 20, 2021 at 11:00 AM EDT

56% of asset owners agree that they must choose between financial gains and incorporating diversity into their investment decisions, revealing there may be deep-seated skepticism about diverse external managers yielding strong returns
Morgan Stanley introduces Diversity Playbook for Asset Owners to help drive change

According to a new report and survey released by Morgan Stanley, while a large majority of pension funds say incorporating gender and racial diversity into investment decisions can be financially beneficial, more than half of asset owners broadly say they believe they must choose between financial gains and a diversity-based approach. This disparity suggests that many asset owners remain sceptical of the financial ROI of diversity, with the exception of public pension funds who are setting the standard for action, according to the survey data.

To better understand how asset owners incorporate diversity into their investment priorities and selection of external managers, Morgan Stanley conducted an inaugural poll of large U.S. asset owners and facilitated supplemental interviews with senior leaders of pension funds.¹

“Today we released findings that shed light on a consequential misconception that still exists among asset owners - that incorporating diversity into their investment decisions comes at the expense of returns,” said Carla Harris, Vice Chairman of Morgan Stanley and Managing Director of the Multicultural Client Strategy Group. “This report is part of Morgan Stanley’s strategy to increase equality in the investing landscape and hopefully encourage more asset owners to recognize the benefits of a diversity-based investment approach.”

The findings reveal four key insights among asset owners:

Diversity is a top priority for investment decisions.

89% of asset owners say that the diversity of external managers specifically is important or a top priority
67% saying their organization has a policy that incorporates diversity as part of an ESG requirement for making investment decisions

Perceived financial trade-off presents a hurdle.

56% of asset owners agree that they must choose between financial gains and incorporating diversity into their investment decisions
There is a sizable perception gap by race and ethnicity: 70% of white asset owners agree compared to just 35% of multicultural asset owners

Public pension funds are leading the way.

63% of public pension fund asset owners say their organization always includes questions about diversity in its due diligence processes when deciding whether to invest with an external manager, compared with 30% of other asset owners
47% of public pension fund asset owners say the diversity of investment teams has always been a priority for their organization, compared to 7% of other asset owners

Need for stronger accountability.

43% of asset owners use a formal measurement tracking system to keep tabs on their external managers’ progress on their D&I targets
38% of asset owners say they always ask questions about diversity in their due diligence processes when deciding whether to invest with an external manager, with another 49% saying they sometimes ask

“Continuing to share data-backed evidence of the financial benefits of a diversity-based approach with the broader asset owner industry will help to dispel inaccurate beliefs about investing with a D&I mindset and motivate more progress,” said Seema Hingorani, Managing Director, Morgan Stanley Investment Management. “I hope that this report will help to inspire more asset owners to re-evaluate their standardization practices to formally track external managers’ progress on meeting diversity targets.”

The survey findings are featured in Asset Owners and Investing in Diversity: Intention versus Action, Morgan Stanley’s first asset owner survey and report to better understand their perspectives on the role of diversity in their investment decisions and choice of external managers. The report introduces the Morgan Stanley Playbook for Asset Owners that outlines prescriptive steps that the industry can take to showcase the tangible benefits of a diversity-based investment approach.

The survey was conducted by Brunswick Group between January 12 and April 28, 2021 in the U.S. and interviewed 63 senior investment decision-makers primarily from public pension funds, college or university endowments, insurance companies, and investment consulting firms. To qualify for the survey, respondents must work for organizations that have at least $500 million in assets under management (AUM). Supplemental interviews with senior leaders of pension funds were conducted from June 15 through July 16, 2021 in the U.S.

The full report and survey results can be viewed online here.

About Morgan Stanley

Morgan Stanley (NYSE: MS) is a leading global financial services firm providing investment banking, securities, wealth management and investment management services. With offices in more than 41 countries, the Firm's employees serve clients worldwide including corporations, governments, institutions and individuals. For more information about Morgan Stanley, please visit www.morganstanley.com.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.

ESG Strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.

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¹ Survey was conducted online and via telephone interviews with senior investment decision makes primarily from public pension funds, college or university endowments, insurance companies and investment consulting firms.