Financial Services

What does diversity and inclusion mean for investment fund managers?

Published on 15th Apr 2021

The benefits of having a diverse pool of talent in the workplace are well proven. The lack of diversity has been identified as the main contributing factor to a number of past financial scandals. That being the case, why are so many firms, particularly those operating within the financial services sector, struggling to cultivate a consistently inclusive culture?


In this Insight, we look at what diversity and inclusion (D&I) means for the investment funds industry, consider the Financial Conduct Authority's (FCA) latest thoughts on how it might regulate the issue, and what steps fund managers should consider taking to get ahead of the curve. Can diversity be achieved through "market forces", such as pressure from investors or clients, or with the aid of industry guidance? Or do firms ultimately need the threat of regulatory intervention to motivate them to embed meaningful change across the industry?

Diversity and inclusion - the 'S' in ESG

The UK's asset management industry has a long history of governance and feels comfortable with the concept. A great deal of focus has been given to environmental issues recently - the need for fund managers to consider the environmental impact of their investment decisions and the importance of good governance practices lie at the heart of the Sustainable Finance Disclosure Regulation, which managers are currently grappling with (see our Insight). But the social aspects of responsible investing or sustainable finance are more difficult to articulate and measure.

Dealing with societal issues such as employee engagement and D&I in the workplace is not always a comfortable or straightforward task for firms, and it may be difficult to pin point what practical steps firms can, or should, be taking to embed the culture shift that the FCA advocates. However, as these issues are driven into the mainstream and become priorities for investors, clients and regulators, now is the time for fund managers to consider whether their existing structures, processes and policies are fit for purpose and likely to meet the growing expectations of such groups. In this regard, firms are likely to find industry guidance on the topic helpful - such as the new guidelines published by the British Private Equity & Venture Capital Association and the Investment Association earlier this year.

Is it a regulatory issue?

According to the FCA, the answer is conclusively "yes". In a recent speech delivered by the FCA's CEO Nikhil Rathi, Mr Rathi warned that unless the FCA sees improvements in diversity at senior levels, it will consider how best to employ its supervisory tools as a means of instigating the necessary change. According to Mr Rathi, it may be that the diversity of management teams – and the inclusivity of the management culture they create – could become part of the FCA's consideration of senior manager applications. He proposes, for example, extending the FCA's "5 conduct questions" to all firms and adding a sixth question along the lines of: is your management team diverse enough to provide adequate challenge and do you create the right environment in which people of all backgrounds can speak up?

D&I is a fundamental part of what makes up a firm's culture, and is more than a question of representation. While there is no rule in the FCA Handbook that says regulated firms have to be diverse or even have an internal or external diversity policy, there are a number of regulatory regimes and initiatives in place aimed at transforming culture and governance (in the broader sense) in financial services. For example, the extension of the Senior Managers and Certification Regime to solo-regulated firms creates a formal link between the behaviour of individuals and the conduct of the firm. The FCA's latest whistleblowing campaign: "In confidence, with confidence" aims to encourage more reporting of potential misconduct to the FCA by those working in financial services. In addition, there is also the prospect of compulsory ethnicity pay gap reporting on the horizon. The FCA has also referred in a recent speech to the fact that D&I is not just relevant to culture, but also to people and leadership, integrity, to treating customers fairly, pricing structures, marketing and advertising, and environmental, social and governance (ESG) strategies.

Everyone is likely to agree that there is a strong business case for diversity in the workplace, however many firms are still grappling with data collection, and the challenges it poses. There is a difference between a principles-based approach to regulation which provides regulated firms with some flexibility in how they deliver the outcomes that the regulator requires, and making the issue of diversity subject to prescriptive rules. The FCA has said that it will not be mandating particular cultures across the pool of 60,000 firms it regulates, so it will be interesting to see just how far it takes any proposal to make D&I part of the senior manager application process in the event that there are not marked improvements in this area.

What steps can investment managers take?

Engendering cultural change is not a straightforward issue, nor is it a static one. Below we identify five key areas fund managers should focus on to ensure that they are developing and retaining diverse talent, educating their workforce on D&I issues, tackling investment bias and helping to foster change within their portfolio companies.

  1. Allocate a budget and set targets: Sufficient resources must be dedicated to ensuring a workplace that is truly diverse at all levels. This should be accompanied by expected timelines of deliverables and tangible outcomes capable of being tracked (for example, D&I targets relating to sex and ethnic diversity within the firm). Progress may also be measured through employee surveys that assess attitudes and perspectives around organisational culture.
  2. Give training a refresh: Outdated diversity training will not suffice to address endemic issues. A firm’s whole culture should ensure that the workplace is open to all those with talent and potential, irrespective of sex, ethnicity, social background or other characteristics. Firms should consider implementing D&I training programmes, with a focus on continuing education – employees should understand the importance of D&I across the organisation.
  3. Review policies: Firms may look to prioritise actions on hiring practice, training, development and access; and carer, flexible working, maternity and returner policies. With the FCA's renewed focus on whistleblowing, firms should also ensure they are prepared to deal with any reports they receive from whistleblowers or enquiries from the FCA prompted by a whistleblower contact. All policies should be reviewed regularly and enforced if breached. It might also be appropriate to nominate an individual to champion D&I policies within the organisation.
  4. Engage with (and challenge) portfolio companies: Portfolio companies should be encouraged to promote diversity at board level and collect diversity and employee engagement data to share at investor updates and at board meetings. Fund managers should consider incorporating D&I into their due diligence process and setting a minimum D&I policy standard for portfolio companies.
  5. Sign up to industry standards: There are a number of industry standards available to help managers measure the fund's performance in relation to D&I and learn about best practices across the industry (for example, "The Standard" developed by Diversity VC, Diversio and OneTech).

Osborne Clarke comment

All regulated firms – not limited to those within the investment funds sector - can expect tough questions from the FCA about representation across grades and whether their culture is open and inclusive and provides a safe space for colleagues at all levels of the organisation. This regulatory focus on culture is nothing new, but the focus specifically on D&I , and how that issue should be regulated, is something that is attracting the FCA's particular attention at the moment.

As investment fund managers plan their "ESG roadmaps" taking account of the myriad rules and regulations in this area, they need to make sure that they are also considering (and budgeting for) a review of their approach to D&I and how it might be improved.


* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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