- Published on
Technical Analysis - Chart Pattern - Symmetrical Triangle
A Symmetrical Triangle is a chart pattern creation where the slope of the price’s highs and the slope of the price’s lows converge together to a point where it looks like a triangle.
This means that neither the buyers nor the sellers could push the price far enough to make a distinct trend. If such type of pattern happens, we get lower highs and higher lows.
If this were a war between the buyers and sellers, then this would be a draw.
A Symmetrical Triangle is a chart pattern creation where the slope of the price’s highs and the slope of the price’s lows converge together to a point where it looks like a triangle.
This means that neither the buyers nor the sellers could push the price far enough to make a distinct trend. If such type of pattern happens, we get lower highs and higher lows.
If this were a war between the buyers and sellers, then this would be a draw.
Since we already know that the price is likely to break out, we can just grab a ride in whatever way the market moves. In the above situation, purchasers wins and the price break and advance in upward direction.
In this example, if we put an entry order above the slope of the lower highs at white top, we would’ve been carried along for a pleasant ride up.
If you had put another entry order below the slope of the higher lows, then you would cancel it as soon as the first order was hit. Also, the most important thing in trading is to must put stoploss in every transaction to avoid false breakout and significant loss.
In this example, if we put an entry order above the slope of the lower highs at white top, we would’ve been carried along for a pleasant ride up.
If you had put another entry order below the slope of the higher lows, then you would cancel it as soon as the first order was hit. Also, the most important thing in trading is to must put stoploss in every transaction to avoid false breakout and significant loss.
- Published on
Technical Analysis - Chart Pattern - Bullish Pennant
The Bullish Pennants signal indicator are that bulls are going to go a-charging again. This suggests that the strong ascent in price would resume after the short time of consolidation in price when the bulls amass enough energy to propel the price higher again. In this scenario, the price made a steep vertical increase before taking a rest.
The Bullish Pennants signal indicator are that bulls are going to go a-charging again. This suggests that the strong ascent in price would resume after the short time of consolidation in price when the bulls amass enough energy to propel the price higher again. In this scenario, the price made a steep vertical increase before taking a rest.
Just like we predicted, the price made another big move in rising direction after the breakout. To play this trade, trader can place the long order just above the white top of the pennant and stop below the bottom of the pennant to avoid fakeouts.
- Published on
Technical Analysis - Chart Pattern - Bearish Pennant
A Bearish Pennant is created at some point of a severe, virtually vertical, downturn. After that significant drop in price, some sellers closed their positions even as other sellers determine to join the trend, causing the market consolidate for a moment. As soon as sufficient sellers jump in the trend, the price breaks below the bottom of the pennant pattern and continue to go downward direction.
A Bearish Pennant is created at some point of a severe, virtually vertical, downturn. After that significant drop in price, some sellers closed their positions even as other sellers determine to join the trend, causing the market consolidate for a moment. As soon as sufficient sellers jump in the trend, the price breaks below the bottom of the pennant pattern and continue to go downward direction.
As you can see, the slide in price proceeded after the price made a breakout to the bottom. To trade this chart pattern, we’d put a short order at the black bottom of the pennant with a stop loss above the pennant
- Published on
Technical Analysis - Chart Pattern - Bullish Rectangle
Formed when the price consolidates for some length in an upswing.
This happens due to the fact that purchasers may want to pause and catch their breath before taking the pair much higher.
In this scenario, price broke the top of the rectangle chart pattern and continued to shoot upward.
Look at the chart, how the price climbed all the way upward after breaking above the top of the rectangle formation.
If we had a long order on white top of the resistance level and stoploss at lower point of second candle, we would’ve caught some pips (“percentage in point” or “price interest point”) on the trade!
Formed when the price consolidates for some length in an upswing.
This happens due to the fact that purchasers may want to pause and catch their breath before taking the pair much higher.
In this scenario, price broke the top of the rectangle chart pattern and continued to shoot upward.
Look at the chart, how the price climbed all the way upward after breaking above the top of the rectangle formation.
If we had a long order on white top of the resistance level and stoploss at lower point of second candle, we would’ve caught some pips (“percentage in point” or “price interest point”) on the trade!
- Published on
Technical Analysis - Chart Pattern - Bearish Rectangle
Bearish Rectangle is produced when the price consolidates for a moment all through a decline.
This happens due to the reality sellers probably need to freeze and collect their breath before taking the pair further lower.
In this situation, price breached the lowest of the rectangle chart pattern and continued to rocket down.
Price broke the bottom of the rectangle chart pattern & went towards the downward direction.
If we put a short order exactly below the support level, we would have made some nice profit on this trade.
The tip: Once the pair goes below the support level, it tends to make a move that is around the size of the rectangle formed.
Bearish Rectangle is produced when the price consolidates for a moment all through a decline.
This happens due to the reality sellers probably need to freeze and collect their breath before taking the pair further lower.
In this situation, price breached the lowest of the rectangle chart pattern and continued to rocket down.
Price broke the bottom of the rectangle chart pattern & went towards the downward direction.
If we put a short order exactly below the support level, we would have made some nice profit on this trade.
The tip: Once the pair goes below the support level, it tends to make a move that is around the size of the rectangle formed.
- Published on
Investment - Bias Recognition and Mitigation
Best Practices and Success Metrics for DEI
The benefits of DEI and several techniques to improving DEI were briefly reviewed in the preceding sessions. In this course, we delve into greater detail on harnessing DEI for outstanding workplace creativity, problem-solving, and performance.
Simply developing a DEI programme does not by itself bring the types of commercial benefits stated above. Research by Josh Bersin, a notable writer on employment, has indicated that organizations ‘focussing on the correct DEI procedures have superior company performance and results.’1
Delivering DEI Outcomes
Expanding the talent pipeline, the first of the six principles of the CFA Institute DEI Code, is vital to fulfilling the needs of the changing workplace and demands of recruits to the industry.
Events over the past few years have changed the character of the job. People are increasingly working from home and work–life balance is more crucial. Younger job entrants are looking for more purpose from their employment beyond the typical cash incentives. People are far more worried with DEI as well as other concerns, including those involving the environment and social justice.
So, should corporations first raise the representation of underrepresented groups or make their organisations inclusive so they can employ and retain diverse talent? They actually need to accomplish both concurrently. Role modelling is key: If potential candidates realize that there are people like themselves that are doing well in their careers inside a company, they are more likely to apply.
Norway, for example, has had a quota for board-level gender diversity for nearly 20 years. Studies have indicated that having this quota has had a good effect on the gender diversity of the talent pipeline and encouraged younger women to enter the field knowing that they can attain to the most senior levels.
Success Metrics
What does success in implementing DEI look like? There are five sorts of indicators organizations can use to measure success on DEI.
Representation
Increase the percentage of roles from underrepresented groups.
Recruitment and Selection
Increase the ratio of applications from underrepresented groups, and the percentage being selected for leadership jobs.
Engagement
Staff surveys should indicate improvement in inclusive practices of managers and leaders.
Promotion
Increase the number of high-potential internal applicants from underrepresented groups that are promoted.
Retention
Decrease the turnover of staff from minority groups.
Robust Monitoring and Tracking
It is crucial for businesses to monitor and track DEI efforts to measure progress. Many organizations, particularly huge firms, put substantial resources and effort into DEI initiatives without any way of understanding whether it has led to a beneficial impact. It is detrimental to engage in DEI initiatives without tracking progress. Programmes may be written off as failures because there was no data to show where underrepresentation had occurred and if it had subsequently been addressed.
Organisations that have built an inclusive culture with a strong sense of fairness, equity, transparency, and community have achieved great performance. According to the 2022 Ipsos Workplace Belonging Survey of US-based workers, these businesses are likely to experience the following:
1.6x more likely to meet or exceed financial targets
1.6x more likely to please and retain consumers
8.4x more likely to be recognised for DEI by stakeholders
21.1x more likely to have diverse leaders and industry-leading DEI
3.1x more likely to efficiently respond to change
2.1x more likely to innovate successfully
2.6x more likely to engage and retain their personnel
4.3x more likely to establish a sense of belonging
Why Is a Sense of Belonging an Important DEI Outcome?
People search for a sense of belonging in all parts of their lives, whether it is with friends and family or at work. Until recently, data tying belonging to performance was fairly thin. But there are now extensive studies that indicate a favorable association with a sense of belonging, a feeling of contentment, and employees being more productive.
The same Ipsos Workplace Belonging Survey linked above, found that 88% of respondents either strongly or somewhat believe that a sense of belonging contributes to increased productivity at work.
In addition, the survey indicated that only 36% believed they worked in an inclusive atmosphere. The research highlights both the value of belonging and that there is a lot of work to do. If less than 40% of people in the world’s most developed economy feel a feeling of belonging, it obviously suggests that employers need to make a lot more effort.
Lack of a sense of belonging may contribute to low morale among employees, which can result in lower levels of performance. Additionally, if employees do not see long-term career opportunities, they will seek alternate employment. Nearly half of respondents to the study are either actively looking for another role or are open to new chances. The survey also indicated that people actively pursuing another employment are much more likely to feel ‘lonely and excluded at work’.
Best Practices and Success Metrics for DEI
The benefits of DEI and several techniques to improving DEI were briefly reviewed in the preceding sessions. In this course, we delve into greater detail on harnessing DEI for outstanding workplace creativity, problem-solving, and performance.
Simply developing a DEI programme does not by itself bring the types of commercial benefits stated above. Research by Josh Bersin, a notable writer on employment, has indicated that organizations ‘focussing on the correct DEI procedures have superior company performance and results.’1
Delivering DEI Outcomes
Expanding the talent pipeline, the first of the six principles of the CFA Institute DEI Code, is vital to fulfilling the needs of the changing workplace and demands of recruits to the industry.
Events over the past few years have changed the character of the job. People are increasingly working from home and work–life balance is more crucial. Younger job entrants are looking for more purpose from their employment beyond the typical cash incentives. People are far more worried with DEI as well as other concerns, including those involving the environment and social justice.
So, should corporations first raise the representation of underrepresented groups or make their organisations inclusive so they can employ and retain diverse talent? They actually need to accomplish both concurrently. Role modelling is key: If potential candidates realize that there are people like themselves that are doing well in their careers inside a company, they are more likely to apply.
Norway, for example, has had a quota for board-level gender diversity for nearly 20 years. Studies have indicated that having this quota has had a good effect on the gender diversity of the talent pipeline and encouraged younger women to enter the field knowing that they can attain to the most senior levels.
Success Metrics
What does success in implementing DEI look like? There are five sorts of indicators organizations can use to measure success on DEI.
Representation
Increase the percentage of roles from underrepresented groups.
Recruitment and Selection
Increase the ratio of applications from underrepresented groups, and the percentage being selected for leadership jobs.
Engagement
Staff surveys should indicate improvement in inclusive practices of managers and leaders.
Promotion
Increase the number of high-potential internal applicants from underrepresented groups that are promoted.
Retention
Decrease the turnover of staff from minority groups.
Robust Monitoring and Tracking
It is crucial for businesses to monitor and track DEI efforts to measure progress. Many organizations, particularly huge firms, put substantial resources and effort into DEI initiatives without any way of understanding whether it has led to a beneficial impact. It is detrimental to engage in DEI initiatives without tracking progress. Programmes may be written off as failures because there was no data to show where underrepresentation had occurred and if it had subsequently been addressed.
Organisations that have built an inclusive culture with a strong sense of fairness, equity, transparency, and community have achieved great performance. According to the 2022 Ipsos Workplace Belonging Survey of US-based workers, these businesses are likely to experience the following:
1.6x more likely to meet or exceed financial targets
1.6x more likely to please and retain consumers
8.4x more likely to be recognised for DEI by stakeholders
21.1x more likely to have diverse leaders and industry-leading DEI
3.1x more likely to efficiently respond to change
2.1x more likely to innovate successfully
2.6x more likely to engage and retain their personnel
4.3x more likely to establish a sense of belonging
Why Is a Sense of Belonging an Important DEI Outcome?
People search for a sense of belonging in all parts of their lives, whether it is with friends and family or at work. Until recently, data tying belonging to performance was fairly thin. But there are now extensive studies that indicate a favorable association with a sense of belonging, a feeling of contentment, and employees being more productive.
The same Ipsos Workplace Belonging Survey linked above, found that 88% of respondents either strongly or somewhat believe that a sense of belonging contributes to increased productivity at work.
In addition, the survey indicated that only 36% believed they worked in an inclusive atmosphere. The research highlights both the value of belonging and that there is a lot of work to do. If less than 40% of people in the world’s most developed economy feel a feeling of belonging, it obviously suggests that employers need to make a lot more effort.
Lack of a sense of belonging may contribute to low morale among employees, which can result in lower levels of performance. Additionally, if employees do not see long-term career opportunities, they will seek alternate employment. Nearly half of respondents to the study are either actively looking for another role or are open to new chances. The survey also indicated that people actively pursuing another employment are much more likely to feel ‘lonely and excluded at work’.
- Published on
Investment - Bias Recognition and Mitigation
Devise an internal communication plan that not only informs employees of inclusion initiatives but also engages and promotes input. Conduct internal marketing, making use of microsites, blogs, posters, and internal DEI champions.
Recognition and Mitigation
Recognising Biases
A typical counterargument to workplace DEI is, ‘if someone has the ability, they will obtain the job’.
This argument relies on employment being granted on merit, the assumption being that recruitment processes are fair and free from bias and discrimination. Therefore, if someone from a minority group fails to secure a job, they did not have the ability.
The concept that the best person will receive the job assumes there is a level playing field, and that if someone fails to achieve in life it is completely their fault. Michael Sandel criticizes this assumption in his book, The Tyranny of Merit.1 He shows evidence that even educational accomplishment is tied to socioeconomic background – for example, two-thirds of Harvard students are from the top fifth of the US income scale.
Even where you have comparably qualified, skilled applicants, biases might lead to vastly different outcomes. These biases may be conscious or unconscious — that is, purposeful or unintentional. Another, lesser-known aspect is something psychologist, author, and Nobel Prize–winner in economics, Daniel Kahneman, characterizes as ‘noise’.
Noise refers to external variables that lead to uneven decision making. External influences can include, for example, the time of day someone conducts a job interview, which is also a form of prejudice that can lead to inconsistent decision making.
1 Michael J. Sandel, The Tyranny of Merit: What’s Become of the Common Good (New York: Farrar, Straus and Giroux, 2020).
Bias and Behaviour
Bias is a set of assumptions and stereotypes that people have regarding those different from themselves. Biases are built up by the effects of individuals around them and can include their background, the media they consume, and their network of friends and acquaintances. Biases can be both positive and bad, such as expecting that persons from specific backgrounds will be better at arithmetic or that a person from a less prestigious university will be less capable.
Bias Is Unavoidable and Human
The amount of information that humans are bombarded with every day is impossible for our conscious brain to cope with, and so, our unconscious brain makes the majority of our daily decisions. In Daniel Kahneman’s book, Thinking, Fast and Slow,2 he discusses System 1 and System 2 thinking. System 1 refers to the quick unconscious decisions that we make, whereas System 2 thinking involves purposeful decisions. According to his studies, more than 90% of our decisions are based on System 1 thinking.
This technique works well for ordinary daily chores, but how does it effect decision making for crucial tasks? Going back to the hiring practices described above, we find that System 1 thinking can permit unconscious stereotypes and prejudices stored in our brain generate decisions that are contradictory to the ideals of fairness and equity.
Bias Translates into Behaviour
Although mentally we may feel that we are inclusive and embrace the idea of meritocracy, in our daily lives, a considerable percentage of our action will be based on unconscious thinking. A male executive may believe that they favor equality of opportunity and more women getting into senior level roles, but in their dealings with female executives, much of their behaviour may be based on their unconscious biases. If, for example, they had a traditional upbringing in which women in the family performed traditional duties of caregiving and managing the home, it may alter their expectations of female executives and how females should behave in the office.
Bias Affects Performance
Bias can create an environment in which groups adversely categorized by management are perceived to perform poorly because they present differently. This attitude is typically the cumulative consequence of the expectations of specific groups held by senior management, and so, those groups could become isolated and ignored and not receive as much management support or recognition. Even tiny mistakes by members of these groups could be exaggerated in the perspective of management, which may result in a self-fulfilling prophesy of bad performance.
INDIVIDUAL
Most diversity projects concentrate at the individual level with the aim of changing attitudes and conduct. Diversity training is the most typical approach at creating inclusiveness. But the media is replete with reports on the ineffectiveness of diversity training, citing substantial study on the subject.
The problem is that training is often being carried out in a vacuum – that is, with no correlation with business objectives. Attitudes and behaviour of individuals may be changed by attending a training session, but if they do not receive support from their supervisors and peers, they may revert to their unconscious biases and related behaviours.
GROUP/TEAM
At the group/team level, insider–outsider dynamics truly come into play. The influence of unconscious prejudice, which perpetuates stereotypes, can be large and destructive because it impacts an entire community of people.
If the executive team, for example, predominantly consists of men, then typical male qualities may be perceived as being perfect for leadership. In this circumstance, women coming into the executive team may find it challenging to make an influence.
ORGANISATION
Stereotypes and bigotry truly become established at the organisation level.
The insider groups at the top of the hierarchy affect policies and processes as well as the unwritten rules, habits, and traditions. These can have unconscious and inadvertent bias built in.
The impact of bias in leadership roles can become institutionalised and apparent in policies, practices, and systems, frequently referred to as systemic bias. Some forms of bias may be advantageous, such as an investing firm being risk adverse in its investment decisions, which may serve its investors well during market volatility or economic turmoil.
While some forms of bias serve a business well, there are other sorts of bias, such as in recruiting or promotion, that can promote prejudice and block talented people from acquiring employment or growing in their career.
MARKETPLACE
A crucial force for change in a linked, globalised society is at the marketplace level.
Does a company’s brand represent the diversity of its consumer base? Is there a gap between the varied picture portrayed in ads and other promotional material and the real make-up of the organisation? Is the organization able to engage a varied consumer in an inclusive manner?
An corporate culture that comes from unconscious bias will come over in client
How Bias Can Affect Investment Decisions
Bias not only influences decisions we make about other people, but it also affects other critical elements of our lives, such as how we manage our finances and even how we invest money. Behavioural finance is the study of the role human psychology plays in the way people invest and its impact on financial markets. This contrasts with standard economic and financial theory, in which there is an assumption that investors are rational and make judgments based on an analysis of all available evidence. All investors, from amateurs to seasoned money managers, have the ability to act impulsively.
Irrational behaviour in this context involves departing from proven analytical techniques and objective decision making. Some of this unreasonable behaviour is based on personal biases. As with any sort of bias, these can be altered by group conduct. Studies within this sector have revealed many types of prejudice that are widespread among investors.
Overconfidence in Forecasting Skills
People displaying unwarranted faith in their own intuitive thinking, judgements, and/or cognitive ability. This bias can lead to hazardous activity, such as persons assuming they can dependably forecast how financial markets would behave.
Confirmation Bias
When a person has an initial theory and is then obsessed on any data that confirms their belief, ignoring other data which may invalidate the hypothesis.
Availability Bias Individuals giving undue weight to easily accessible information rather than carrying out comprehensive investigation and analysis that may challenge readily available data.
Illusion of Control
Similar to overconfidence, individuals assume they can control uncertain outcomes, such as corporate success or stock price behaviour
Self-Attribution Bias
People take credit for triumphs while blaming failures on external factors. This behaviour may be an attempt to preserve one’s self-esteem, while insulating oneself from taking personal responsibility for failures.
Hindsight Bias
Another protection strategy when, rather than conceding that their projections were not as accurate as they expected, individuals claim to have ‘known it all along’.
Biases in all their manifestations are ultimately a manifestation of human psychology that can create unreasonable action.
As much as prejudices can affect workplace and team dynamics, they can also impair investor–client relationships and reduce the effectiveness of investment teams. Firms that address workplace bias and effectively build an inclusive working environment will benefit from a workforce that has a strong sense of belonging. This will lead to greater levels of morale and dedication and help eliminate investment bias by permitting strong, yet respectful, debate.
Mitigating Biases
Variables like bias can lead to unjust decisions being made in all facets of the employee experience. The significance of DEI is that it adds challenge into processes. DEI training enables individuals to take a step back to look at whether their decisions and the decision-making process were fair and transparent.
Building in supervision and examination into decision-making processes ensures a fairer conclusion. Even where there are fair and open processes in place, extraneous variables, such as time constraint, might lead to circumvention. If there is comprehensive and consistent scrutiny of decisions, bypassing protocols is less likely to happen.
" " Consistently following an inclusive strategy leads to behaviour change as the approach becomes part of organizational culture.
Can People Become De-Biased?
The objective of unconscious bias training is to make attendees aware of biases and assist them accept and realize that they and everyone else have biases. The theory is that if people comprehend the notion of bias and acknowledge their own prejudices, this heightened awareness would lead to less prejudiced decision making.
" " Single training sessions without ongoing coaching, however, are unlikely to lead to any good or long-lasting behavioural change. Despite unconscious prejudice being innate in all of us, there are steps that businesses may take to lessen its impact:
Help individuals acknowledge the idea that they and everyone else have biases, and that it has an impact on their decision making and behaviours.
Individuals should become aware of their prejudices by intentionally thinking about views that they hold about others different from themselves. Writing things down and establishing a list to which they can refer can be beneficial.
Interact often with people different from yourself.
Utilise 360 feedback systems as part of performance review, in which a varied set of colleagues can remark on performance.
Develop cross-cultural awareness through literature and training.
Addressing Workplace Bias
A proven strategy to avoid bias from impacting judgments is to build in safeguards, oversight, and examination to interrupt biased behaviour. As an example, just establishing a policy stating hiring managers need to conduct interviews of job applicants as a panel would not contribute to inclusion unless there are measures to assure adherence to agreed-on policies. Safeguards include requiring recruiting managers to confirm who will be the panel members for all rounds of interviews, sending interview notes to HR, and following objective and consistent criteria. Additionally, the talent acquisition unit should perform frequent random audits of the hiring process and interviewees to guarantee compliance.
Assess the organisation’s culture in connection to DEI through surveys, focus groups, and one-to-one interviews.
Review policies, processes, and systems and analyse customer and marketplace data.
Adopt a top-down strategy. Form a diversity council chaired by the CEO or other senior leaders to design a plan and oversee DEI activities. The council should include of top officials from major revenue-generating departments, not merely the human resources department.
Produce DEI metrics with both quantitative and qualitative indicators.
As part of the broader approach, provide diversity-awareness training looking at unconscious prejudice and techniques for recognizing individual fears surrounding dealing with persons from under-represented groups.
Assess the impact of DEI programmes. Review data on the achievement of targets set in diversity measures. Assess what has and what has not worked. Identify follow-up actions.
Over time, new behaviours will get embedded, and that is when actual behavioural change will happen.
Individuals can limit the influence of their personal prejudices simply by ensuring they follow processes, and, over time, it becomes a part of business as usual.
As an example, when a manager has to recruit a new team member either owing to business development or an existing employee departing, they are under a time pressure. It is customary in such cases to go with the safest alternative in the manager’s judgment, which means the decision is impacted by the manager’s personal biases. If the manager works in an organisation where there is strong scrutiny of recruitment decisions, following a fair and transparent process becomes internalised by management.
Devise an internal communication plan that not only informs employees of inclusion initiatives but also engages and promotes input. Conduct internal marketing, making use of microsites, blogs, posters, and internal DEI champions.
Recognition and Mitigation
Recognising Biases
A typical counterargument to workplace DEI is, ‘if someone has the ability, they will obtain the job’.
This argument relies on employment being granted on merit, the assumption being that recruitment processes are fair and free from bias and discrimination. Therefore, if someone from a minority group fails to secure a job, they did not have the ability.
The concept that the best person will receive the job assumes there is a level playing field, and that if someone fails to achieve in life it is completely their fault. Michael Sandel criticizes this assumption in his book, The Tyranny of Merit.1 He shows evidence that even educational accomplishment is tied to socioeconomic background – for example, two-thirds of Harvard students are from the top fifth of the US income scale.
Even where you have comparably qualified, skilled applicants, biases might lead to vastly different outcomes. These biases may be conscious or unconscious — that is, purposeful or unintentional. Another, lesser-known aspect is something psychologist, author, and Nobel Prize–winner in economics, Daniel Kahneman, characterizes as ‘noise’.
Noise refers to external variables that lead to uneven decision making. External influences can include, for example, the time of day someone conducts a job interview, which is also a form of prejudice that can lead to inconsistent decision making.
1 Michael J. Sandel, The Tyranny of Merit: What’s Become of the Common Good (New York: Farrar, Straus and Giroux, 2020).
Bias and Behaviour
Bias is a set of assumptions and stereotypes that people have regarding those different from themselves. Biases are built up by the effects of individuals around them and can include their background, the media they consume, and their network of friends and acquaintances. Biases can be both positive and bad, such as expecting that persons from specific backgrounds will be better at arithmetic or that a person from a less prestigious university will be less capable.
Bias Is Unavoidable and Human
The amount of information that humans are bombarded with every day is impossible for our conscious brain to cope with, and so, our unconscious brain makes the majority of our daily decisions. In Daniel Kahneman’s book, Thinking, Fast and Slow,2 he discusses System 1 and System 2 thinking. System 1 refers to the quick unconscious decisions that we make, whereas System 2 thinking involves purposeful decisions. According to his studies, more than 90% of our decisions are based on System 1 thinking.
This technique works well for ordinary daily chores, but how does it effect decision making for crucial tasks? Going back to the hiring practices described above, we find that System 1 thinking can permit unconscious stereotypes and prejudices stored in our brain generate decisions that are contradictory to the ideals of fairness and equity.
Bias Translates into Behaviour
Although mentally we may feel that we are inclusive and embrace the idea of meritocracy, in our daily lives, a considerable percentage of our action will be based on unconscious thinking. A male executive may believe that they favor equality of opportunity and more women getting into senior level roles, but in their dealings with female executives, much of their behaviour may be based on their unconscious biases. If, for example, they had a traditional upbringing in which women in the family performed traditional duties of caregiving and managing the home, it may alter their expectations of female executives and how females should behave in the office.
Bias Affects Performance
Bias can create an environment in which groups adversely categorized by management are perceived to perform poorly because they present differently. This attitude is typically the cumulative consequence of the expectations of specific groups held by senior management, and so, those groups could become isolated and ignored and not receive as much management support or recognition. Even tiny mistakes by members of these groups could be exaggerated in the perspective of management, which may result in a self-fulfilling prophesy of bad performance.
INDIVIDUAL
Most diversity projects concentrate at the individual level with the aim of changing attitudes and conduct. Diversity training is the most typical approach at creating inclusiveness. But the media is replete with reports on the ineffectiveness of diversity training, citing substantial study on the subject.
The problem is that training is often being carried out in a vacuum – that is, with no correlation with business objectives. Attitudes and behaviour of individuals may be changed by attending a training session, but if they do not receive support from their supervisors and peers, they may revert to their unconscious biases and related behaviours.
GROUP/TEAM
At the group/team level, insider–outsider dynamics truly come into play. The influence of unconscious prejudice, which perpetuates stereotypes, can be large and destructive because it impacts an entire community of people.
If the executive team, for example, predominantly consists of men, then typical male qualities may be perceived as being perfect for leadership. In this circumstance, women coming into the executive team may find it challenging to make an influence.
ORGANISATION
Stereotypes and bigotry truly become established at the organisation level.
The insider groups at the top of the hierarchy affect policies and processes as well as the unwritten rules, habits, and traditions. These can have unconscious and inadvertent bias built in.
The impact of bias in leadership roles can become institutionalised and apparent in policies, practices, and systems, frequently referred to as systemic bias. Some forms of bias may be advantageous, such as an investing firm being risk adverse in its investment decisions, which may serve its investors well during market volatility or economic turmoil.
While some forms of bias serve a business well, there are other sorts of bias, such as in recruiting or promotion, that can promote prejudice and block talented people from acquiring employment or growing in their career.
MARKETPLACE
A crucial force for change in a linked, globalised society is at the marketplace level.
Does a company’s brand represent the diversity of its consumer base? Is there a gap between the varied picture portrayed in ads and other promotional material and the real make-up of the organisation? Is the organization able to engage a varied consumer in an inclusive manner?
An corporate culture that comes from unconscious bias will come over in client
How Bias Can Affect Investment Decisions
Bias not only influences decisions we make about other people, but it also affects other critical elements of our lives, such as how we manage our finances and even how we invest money. Behavioural finance is the study of the role human psychology plays in the way people invest and its impact on financial markets. This contrasts with standard economic and financial theory, in which there is an assumption that investors are rational and make judgments based on an analysis of all available evidence. All investors, from amateurs to seasoned money managers, have the ability to act impulsively.
Irrational behaviour in this context involves departing from proven analytical techniques and objective decision making. Some of this unreasonable behaviour is based on personal biases. As with any sort of bias, these can be altered by group conduct. Studies within this sector have revealed many types of prejudice that are widespread among investors.
Overconfidence in Forecasting Skills
People displaying unwarranted faith in their own intuitive thinking, judgements, and/or cognitive ability. This bias can lead to hazardous activity, such as persons assuming they can dependably forecast how financial markets would behave.
Confirmation Bias
When a person has an initial theory and is then obsessed on any data that confirms their belief, ignoring other data which may invalidate the hypothesis.
Availability Bias Individuals giving undue weight to easily accessible information rather than carrying out comprehensive investigation and analysis that may challenge readily available data.
Illusion of Control
Similar to overconfidence, individuals assume they can control uncertain outcomes, such as corporate success or stock price behaviour
Self-Attribution Bias
People take credit for triumphs while blaming failures on external factors. This behaviour may be an attempt to preserve one’s self-esteem, while insulating oneself from taking personal responsibility for failures.
Hindsight Bias
Another protection strategy when, rather than conceding that their projections were not as accurate as they expected, individuals claim to have ‘known it all along’.
Biases in all their manifestations are ultimately a manifestation of human psychology that can create unreasonable action.
As much as prejudices can affect workplace and team dynamics, they can also impair investor–client relationships and reduce the effectiveness of investment teams. Firms that address workplace bias and effectively build an inclusive working environment will benefit from a workforce that has a strong sense of belonging. This will lead to greater levels of morale and dedication and help eliminate investment bias by permitting strong, yet respectful, debate.
Mitigating Biases
Variables like bias can lead to unjust decisions being made in all facets of the employee experience. The significance of DEI is that it adds challenge into processes. DEI training enables individuals to take a step back to look at whether their decisions and the decision-making process were fair and transparent.
Building in supervision and examination into decision-making processes ensures a fairer conclusion. Even where there are fair and open processes in place, extraneous variables, such as time constraint, might lead to circumvention. If there is comprehensive and consistent scrutiny of decisions, bypassing protocols is less likely to happen.
" " Consistently following an inclusive strategy leads to behaviour change as the approach becomes part of organizational culture.
Can People Become De-Biased?
The objective of unconscious bias training is to make attendees aware of biases and assist them accept and realize that they and everyone else have biases. The theory is that if people comprehend the notion of bias and acknowledge their own prejudices, this heightened awareness would lead to less prejudiced decision making.
" " Single training sessions without ongoing coaching, however, are unlikely to lead to any good or long-lasting behavioural change. Despite unconscious prejudice being innate in all of us, there are steps that businesses may take to lessen its impact:
Help individuals acknowledge the idea that they and everyone else have biases, and that it has an impact on their decision making and behaviours.
Individuals should become aware of their prejudices by intentionally thinking about views that they hold about others different from themselves. Writing things down and establishing a list to which they can refer can be beneficial.
Interact often with people different from yourself.
Utilise 360 feedback systems as part of performance review, in which a varied set of colleagues can remark on performance.
Develop cross-cultural awareness through literature and training.
Addressing Workplace Bias
A proven strategy to avoid bias from impacting judgments is to build in safeguards, oversight, and examination to interrupt biased behaviour. As an example, just establishing a policy stating hiring managers need to conduct interviews of job applicants as a panel would not contribute to inclusion unless there are measures to assure adherence to agreed-on policies. Safeguards include requiring recruiting managers to confirm who will be the panel members for all rounds of interviews, sending interview notes to HR, and following objective and consistent criteria. Additionally, the talent acquisition unit should perform frequent random audits of the hiring process and interviewees to guarantee compliance.
Assess the organisation’s culture in connection to DEI through surveys, focus groups, and one-to-one interviews.
Review policies, processes, and systems and analyse customer and marketplace data.
Adopt a top-down strategy. Form a diversity council chaired by the CEO or other senior leaders to design a plan and oversee DEI activities. The council should include of top officials from major revenue-generating departments, not merely the human resources department.
Produce DEI metrics with both quantitative and qualitative indicators.
As part of the broader approach, provide diversity-awareness training looking at unconscious prejudice and techniques for recognizing individual fears surrounding dealing with persons from under-represented groups.
Assess the impact of DEI programmes. Review data on the achievement of targets set in diversity measures. Assess what has and what has not worked. Identify follow-up actions.
Over time, new behaviours will get embedded, and that is when actual behavioural change will happen.
Individuals can limit the influence of their personal prejudices simply by ensuring they follow processes, and, over time, it becomes a part of business as usual.
As an example, when a manager has to recruit a new team member either owing to business development or an existing employee departing, they are under a time pressure. It is customary in such cases to go with the safest alternative in the manager’s judgment, which means the decision is impacted by the manager’s personal biases. If the manager works in an organisation where there is strong scrutiny of recruitment decisions, following a fair and transparent process becomes internalised by management.
- Published on
Investment - Key Concepts in DEI
CFA Institute DEI Code
A major purpose that CFA Institute offers is to design and implement codes, best practices, and guidelines for the investment management sector. CFA Institute launched the DEI Code in February 2022 in response to demand from investment industry professionals. Built by a very diverse working group of investment industry professionals, CFA Institute members, workers, and DEI practitioners, the Code is a set of six principles aimed to encourage diversity, equity, and inclusion across the investment management business. It is a global code and is being rolled out on a regional basis, commencing with the United States and Canada presently and then followed by the United Kingdom and Europe.
Principle 1
Pipeline – We commit to expanding the diversified talent pipeline.
Principle 2
Talent Acquisition — We pledge to establishing, executing, and sustaining inclusive and equitable hiring and onboarding policies.
Principle 3
Promotion and Retention — We commit to establishing, implementing, and maintaining inclusive and equitable promotion and retention procedures to minimize barriers to development.
Principle 4
Leadership — We promise to leveraging our position and voice to support DEI and improve DEI outcomes in the investing industry. We will hold ourselves responsible for our firm’s growth.
Principle 5
Influence – We vow to leverage our role, position, and voice to support and increase measurable DEI results in the investing sector.
Principle 6 – Measurement — We commit to measuring and reporting on our progress in driving superior DEI results inside our organization. We will offer regular reporting on our firm’s DEI indicators to our senior management, our board, and CFA Institute.
Drivers for Engaging on DEI
Human distinctions, such as color, gender, ethnicity, ability, age, religion or belief, sexual orientation, and socioeconomic status, position individuals either within dominant social identity groups or subjugated groups. This separation promotes insider–outsider dynamics, with the insider groups usually at the top of the hierarchy. The demographic environment often decides who is part of the insider group and who is part of the outsider group. Beyond demographic disparities, insider–outsider relations may be based on the level of education, university attended, and even which workplace department individuals are a part of, with some departments and individuals perceived as bringing more value to the business than others.
DEI is vital in the workplace because valued employees perform better, and people feel valued when they can be themselves. If individuals have to cover any element of their identity in order to fit in, they may not feel engaged in the workplace. As a result, people may not perform to their best skills.
There is a body of evidence that says having a diverse workforce raises levels of innovation and creativity, enhances abilities for addressing challenges, and improves financial performance.
A 2013 report from Deloitte Australia and Victorian Equal Opportunity and Human Rights Commission titled ‘Waiter, Is That Inclusion in My Soup? A New Recipe to Improve Business Performance’, demonstrated that inclusive businesses experience the following:
83% increase in the ability to innovate 31% uplift in the responsiveness to changing client needs
42% boost in team collaboration
Willis Towers Watson, which has USD2.6 trillion in assets under advisement, studied more than 2,400 individual investment teams globally and found that diverse groups outperformed those with no gender or ethnic minority personnel by 20 bps (basis points) a year, on average.
What is Discrimination?
There are three types of discrimination, which are detailed in the slides below. The slides will first introduce the form of discrimination and clarify each term, and then you will be presented with a scenario to assist you better grasp how prejudice can manifest in practice.
Direct Discrimination
Direct discrimination is when an individual is discriminated against because of a personal attribute they possess or are believed to possess.
Indirect Discrimination
Indirect discrimination is where a condition applies equally to everyone yet puts individuals that share a particular attribute at a disadvantage. The condition has no objective justification.
Harassment
Harassment includes unwanted activity, verbal and/or physical, that has the impact of making a person uncomfortable, embarrassed, intimidated, or upset. Sexual harassment is one of the most common types of harassment.
CFA Institute DEI Code
A major purpose that CFA Institute offers is to design and implement codes, best practices, and guidelines for the investment management sector. CFA Institute launched the DEI Code in February 2022 in response to demand from investment industry professionals. Built by a very diverse working group of investment industry professionals, CFA Institute members, workers, and DEI practitioners, the Code is a set of six principles aimed to encourage diversity, equity, and inclusion across the investment management business. It is a global code and is being rolled out on a regional basis, commencing with the United States and Canada presently and then followed by the United Kingdom and Europe.
Principle 1
Pipeline – We commit to expanding the diversified talent pipeline.
Principle 2
Talent Acquisition — We pledge to establishing, executing, and sustaining inclusive and equitable hiring and onboarding policies.
Principle 3
Promotion and Retention — We commit to establishing, implementing, and maintaining inclusive and equitable promotion and retention procedures to minimize barriers to development.
Principle 4
Leadership — We promise to leveraging our position and voice to support DEI and improve DEI outcomes in the investing industry. We will hold ourselves responsible for our firm’s growth.
Principle 5
Influence – We vow to leverage our role, position, and voice to support and increase measurable DEI results in the investing sector.
Principle 6 – Measurement — We commit to measuring and reporting on our progress in driving superior DEI results inside our organization. We will offer regular reporting on our firm’s DEI indicators to our senior management, our board, and CFA Institute.
Drivers for Engaging on DEI
Human distinctions, such as color, gender, ethnicity, ability, age, religion or belief, sexual orientation, and socioeconomic status, position individuals either within dominant social identity groups or subjugated groups. This separation promotes insider–outsider dynamics, with the insider groups usually at the top of the hierarchy. The demographic environment often decides who is part of the insider group and who is part of the outsider group. Beyond demographic disparities, insider–outsider relations may be based on the level of education, university attended, and even which workplace department individuals are a part of, with some departments and individuals perceived as bringing more value to the business than others.
DEI is vital in the workplace because valued employees perform better, and people feel valued when they can be themselves. If individuals have to cover any element of their identity in order to fit in, they may not feel engaged in the workplace. As a result, people may not perform to their best skills.
There is a body of evidence that says having a diverse workforce raises levels of innovation and creativity, enhances abilities for addressing challenges, and improves financial performance.
A 2013 report from Deloitte Australia and Victorian Equal Opportunity and Human Rights Commission titled ‘Waiter, Is That Inclusion in My Soup? A New Recipe to Improve Business Performance’, demonstrated that inclusive businesses experience the following:
83% increase in the ability to innovate 31% uplift in the responsiveness to changing client needs
42% boost in team collaboration
Willis Towers Watson, which has USD2.6 trillion in assets under advisement, studied more than 2,400 individual investment teams globally and found that diverse groups outperformed those with no gender or ethnic minority personnel by 20 bps (basis points) a year, on average.
What is Discrimination?
There are three types of discrimination, which are detailed in the slides below. The slides will first introduce the form of discrimination and clarify each term, and then you will be presented with a scenario to assist you better grasp how prejudice can manifest in practice.
Direct Discrimination
Direct discrimination is when an individual is discriminated against because of a personal attribute they possess or are believed to possess.
Indirect Discrimination
Indirect discrimination is where a condition applies equally to everyone yet puts individuals that share a particular attribute at a disadvantage. The condition has no objective justification.
Harassment
Harassment includes unwanted activity, verbal and/or physical, that has the impact of making a person uncomfortable, embarrassed, intimidated, or upset. Sexual harassment is one of the most common types of harassment.
- Published on
Investment - Investor Engagement and Stewardship
Stewardship is often used as an overall word embracing the approach that investors adopt as active and involved owners of the firms and other entities in which they invest through voting and engagement. The name ‘steward’ is derived from two old English words — ‘stig’, meaning house, and ‘weard’, meaning guard. What in the Middle Ages referred to protection of the home, in the 21st century can apply to the protection of financial assets. The steward is the representative of the owner, responsible with acting in the owner’s interests and producing returns and long-term value from their assets.
Fiduciary duty is a requirement by the person (fiduciary) to look after another person’s assets, and they must attempt to maintain and increase the value of the assets with which they have been charged so that they are able to restore them in good order to their owner. As a steward is the representative of the owner, caring for assets on their behalf, the steward is tasked with fiduciary duty.
Shareholder involvement is the means in which investors put into effect their stewardship obligations in keeping with the second principle from the Principles for Responsible Investment (PRI), which states:
‘We will be engaged owners and incorporate environmental, social, and governance (ESG) issues into our ownership policies and practices’.
Stakeholder involvement is sometimes described as purposeful discussion with a specific objective in mind. That purpose will vary every investment, but often relates to improving companies’ business processes, notably in relation to the management of ESG issues.
Given its focus on protecting and enhancing long-term value on behalf of the asset owner, engagement can span a vast range of issues that affect the long-term worth of a firm, including the following:
Strategy
Capital structure
Operational performance and delivery
Risk management
Pay
Corporate governance
ESG elements are crucial to these challenges. Opportunities and challenges afforded by ESG changes need to be incorporated in a business’s strategic thinking. A complete review of operational success must involve not only financials, but also critical areas essential to the company’s stakeholders:
The long-term health of the firm, such as interactions with the workforce
A culture that supports long-term value generation
Dealing freely and fairly with suppliers and consumers
Having sufficient and effective environmental controls in place
An awareness of the whole range of significant risks facing a firm will always include ESG factors, and investors will want to engage with companies on this basis.
Engagement Dynamics
In a 2018 report, PRI outlined three ESG engagement characteristics that it believes create value:
Communicative dynamics (the sharing of information)
Learning dynamics (improving knowledge)
Political dynamics (creating relationships)
Developing these dynamics needs investors to go beyond a financial understanding of the firm and its actions. Unless the steward attempts to develop communication and relationships and has a desire to learn, engagement is unlikely to be successful.
To be successful in engagement, investors need to respect the specific conditions of the company, seeking knowledge and rapport rather than just proclaiming that business practices need to change.
Benefits of Stewardship and Engagement
Stewardship and participation are important because they boost shareholder value and support investors in the performance of their fiduciary obligation. When done correctly, stewardship and engagement foster better information flows between investors and investees as the parties discuss and debate business-related issues.
This flow allows them to learn from each other and to create a connection, but most crucially to encourage change when shareholders convey their thoughts on major difficulties that the firm is facing.
Engagement helps organizations understand their investors’ (and potential investors’) expectations, allowing them to modify their long-term strategies accordingly to fit them. Engagement also enables companies to explain how their approach to sustainability links to their overall business strategy and provides an opportunity for corporations to remark on grades or scores determined by frameworks that they may believe do not reflect the complexity of an issue.
Engagement also allows investors to work closely with a company over time on specific governance, social, or environmental concerns that the investor perceives as posing a downside risk to the business. By interacting with companies’ management — either individually or collectively — investment firms are able to push corporations to adopt better ESG practices, or at least to relinquish problematic practices.
Effective Engagement
If involvement is to be effective in achieving change results, it needs that a clear objective is set from the start. The Investor Forum – a UK association set up to encourage collective conversation between investors and investees — explains involvement as follows:
‘Engagement is active discussion with a particular and targeted objective.… The underlying aim…should always be to protect and enhance the value of assets’.
Characteristics of effective engagement include the following:
Focus on long-term value preservation and creation
Framed by a comprehensive understanding of the nature of the company and drivers of its business model
Recognition that change is a process and should not be unnecessarily rushed
Consistent, clear, and honest messages and dialogues
Resourced correctly so that it may be delivered professionally
Resourced efficiently
Ongoing reflection so that lessons are gained to better future engagement activities
There are occasions in which engagement compels an investor to have a view. These instances include corporate acts, such as share issuances in which the investor can choose to participate or not, and planned takeovers in which the investor must decide whether to sell or to hang on to their shares.
Voting
Voting is one part of stewardship engagement and tends to focus on corporate governance problems highlighted at shareholders’ meetings. Voting normally occurs yearly at the annual general meeting (AGM) and occasionally in between at special sessions called extraordinary general meetings (EGMs).
questions considered for vote include frequently fundamental questions like the organization of the board, audit and oversight, CEO remuneration, and the capital structure of the company. Considering such matters with due care is part of fiduciary duty, and appropriate care may often demand active communication with the corporation to grasp the issues and convey any concerns and opinions.
Engagement Styles
Engagement styles differ depending on the legacy of stewardship teams. There is a distinction in thinking and strategy between investment teams with a history of governance-led involvement and those that have worked more on the environmental and social side. As material E and S concerns come from the nature of a company’s business activities, teams with this background tend to be organised by sector.
Such teams tend to focus on individual environmental and social issues and to pursue them strongly across sectors or the market as a whole. Because governance is determined more by national law and norms, firms with a governance legacy tend to focus on particular enterprises.
The beginning point for passive investors is often a particular issue and they attempt to engage with all companies impacted by that issue.
Active investors start with a company and its business difficulties and design a bespoke involvement approach cutting across a range of issues.
Issue-based methods to involvement are generally complemented with examples of best practices in a given area. By expecting all companies in a given sector to embrace certain best practices, investors may over time shift overall sector or industry practice advances.
firm-focussed engagement tries to improve practice across a number of important ESG issues at a particular firm – the purpose is to boost performance of the portfolio overall, both in terms of ESG performance and investment performance.
" " Used successfully, engagement can be a conduit for positive outcomes. It can be carried out throughout the complete range of financial asset types. The ideas and mindset of involvement and stewardship need to be applied with good reason and discretion to the diverse conditions and the levers that the investor controls.
Stewardship is often used as an overall word embracing the approach that investors adopt as active and involved owners of the firms and other entities in which they invest through voting and engagement. The name ‘steward’ is derived from two old English words — ‘stig’, meaning house, and ‘weard’, meaning guard. What in the Middle Ages referred to protection of the home, in the 21st century can apply to the protection of financial assets. The steward is the representative of the owner, responsible with acting in the owner’s interests and producing returns and long-term value from their assets.
Fiduciary duty is a requirement by the person (fiduciary) to look after another person’s assets, and they must attempt to maintain and increase the value of the assets with which they have been charged so that they are able to restore them in good order to their owner. As a steward is the representative of the owner, caring for assets on their behalf, the steward is tasked with fiduciary duty.
Shareholder involvement is the means in which investors put into effect their stewardship obligations in keeping with the second principle from the Principles for Responsible Investment (PRI), which states:
‘We will be engaged owners and incorporate environmental, social, and governance (ESG) issues into our ownership policies and practices’.
Stakeholder involvement is sometimes described as purposeful discussion with a specific objective in mind. That purpose will vary every investment, but often relates to improving companies’ business processes, notably in relation to the management of ESG issues.
Given its focus on protecting and enhancing long-term value on behalf of the asset owner, engagement can span a vast range of issues that affect the long-term worth of a firm, including the following:
Strategy
Capital structure
Operational performance and delivery
Risk management
Pay
Corporate governance
ESG elements are crucial to these challenges. Opportunities and challenges afforded by ESG changes need to be incorporated in a business’s strategic thinking. A complete review of operational success must involve not only financials, but also critical areas essential to the company’s stakeholders:
The long-term health of the firm, such as interactions with the workforce
A culture that supports long-term value generation
Dealing freely and fairly with suppliers and consumers
Having sufficient and effective environmental controls in place
An awareness of the whole range of significant risks facing a firm will always include ESG factors, and investors will want to engage with companies on this basis.
Engagement Dynamics
In a 2018 report, PRI outlined three ESG engagement characteristics that it believes create value:
Communicative dynamics (the sharing of information)
Learning dynamics (improving knowledge)
Political dynamics (creating relationships)
Developing these dynamics needs investors to go beyond a financial understanding of the firm and its actions. Unless the steward attempts to develop communication and relationships and has a desire to learn, engagement is unlikely to be successful.
To be successful in engagement, investors need to respect the specific conditions of the company, seeking knowledge and rapport rather than just proclaiming that business practices need to change.
Benefits of Stewardship and Engagement
Stewardship and participation are important because they boost shareholder value and support investors in the performance of their fiduciary obligation. When done correctly, stewardship and engagement foster better information flows between investors and investees as the parties discuss and debate business-related issues.
This flow allows them to learn from each other and to create a connection, but most crucially to encourage change when shareholders convey their thoughts on major difficulties that the firm is facing.
Engagement helps organizations understand their investors’ (and potential investors’) expectations, allowing them to modify their long-term strategies accordingly to fit them. Engagement also enables companies to explain how their approach to sustainability links to their overall business strategy and provides an opportunity for corporations to remark on grades or scores determined by frameworks that they may believe do not reflect the complexity of an issue.
Engagement also allows investors to work closely with a company over time on specific governance, social, or environmental concerns that the investor perceives as posing a downside risk to the business. By interacting with companies’ management — either individually or collectively — investment firms are able to push corporations to adopt better ESG practices, or at least to relinquish problematic practices.
Effective Engagement
If involvement is to be effective in achieving change results, it needs that a clear objective is set from the start. The Investor Forum – a UK association set up to encourage collective conversation between investors and investees — explains involvement as follows:
‘Engagement is active discussion with a particular and targeted objective.… The underlying aim…should always be to protect and enhance the value of assets’.
Characteristics of effective engagement include the following:
Focus on long-term value preservation and creation
Framed by a comprehensive understanding of the nature of the company and drivers of its business model
Recognition that change is a process and should not be unnecessarily rushed
Consistent, clear, and honest messages and dialogues
Resourced correctly so that it may be delivered professionally
Resourced efficiently
Ongoing reflection so that lessons are gained to better future engagement activities
There are occasions in which engagement compels an investor to have a view. These instances include corporate acts, such as share issuances in which the investor can choose to participate or not, and planned takeovers in which the investor must decide whether to sell or to hang on to their shares.
Voting
Voting is one part of stewardship engagement and tends to focus on corporate governance problems highlighted at shareholders’ meetings. Voting normally occurs yearly at the annual general meeting (AGM) and occasionally in between at special sessions called extraordinary general meetings (EGMs).
questions considered for vote include frequently fundamental questions like the organization of the board, audit and oversight, CEO remuneration, and the capital structure of the company. Considering such matters with due care is part of fiduciary duty, and appropriate care may often demand active communication with the corporation to grasp the issues and convey any concerns and opinions.
Engagement Styles
Engagement styles differ depending on the legacy of stewardship teams. There is a distinction in thinking and strategy between investment teams with a history of governance-led involvement and those that have worked more on the environmental and social side. As material E and S concerns come from the nature of a company’s business activities, teams with this background tend to be organised by sector.
Such teams tend to focus on individual environmental and social issues and to pursue them strongly across sectors or the market as a whole. Because governance is determined more by national law and norms, firms with a governance legacy tend to focus on particular enterprises.
The beginning point for passive investors is often a particular issue and they attempt to engage with all companies impacted by that issue.
Active investors start with a company and its business difficulties and design a bespoke involvement approach cutting across a range of issues.
Issue-based methods to involvement are generally complemented with examples of best practices in a given area. By expecting all companies in a given sector to embrace certain best practices, investors may over time shift overall sector or industry practice advances.
firm-focussed engagement tries to improve practice across a number of important ESG issues at a particular firm – the purpose is to boost performance of the portfolio overall, both in terms of ESG performance and investment performance.
" " Used successfully, engagement can be a conduit for positive outcomes. It can be carried out throughout the complete range of financial asset types. The ideas and mindset of involvement and stewardship need to be applied with good reason and discretion to the diverse conditions and the levers that the investor controls.
- Published on
Investment - The Benefits and Challenges of ESG Adherence
Perspectives for Adhering to Good Practices in ESG
There are a range of viewpoints on the purpose and value, both to investors and to society more broadly, on integrating ESG factors into investing decisions. We will explore those perspectives in the next sections.
Risk Perspective
According to the World Economic Forum’s (WEF) top global hazards, climate now tops the risk agenda.
In 2015, Mark Carney, then Governor of the Bank of England and head of the Financial Stability Board, in a speech to financial regulators that became a cornerstone for the integration of climate change, referred to climate change as the tragedy of the horizon. In his annual letter to chief executives in 2020, Larry Fink, the CEO of BlackRock, announced that the investment firm would step up its assessment of climate change in its investment research since climate change was altering the world’s financial system.
In a parallel letter to its clients, BlackRock committed to divesting from its actively managed portfolios any companies that generate more than 25% of their revenues from coal production and to requiring reporting from investee companies on their climate-related risks and plans for operating under the goals of the Paris Agreement to limit global warming to less than 2°C (3.6°F) above pre-industrial levels.
Fiduciary Duty and Economic Perspectives
FIDUCIARY DUTY PERSPECTIVE
In the current investment system, financial institutions or individuals, known as fiduciaries, manage money or other assets on behalf of beneficiaries and investors. Beneficiaries and investors rely on these fiduciaries to serve in their best interests, which are often defined purely in financial terms.
Because of the misunderstanding that ESG elements are not financially relevant, some investors have used the concept of fiduciary obligation as an excuse to not include ESG issues. But increasingly, academic studies and work performed over the past decade by progressive investing associations, such the Principles for Responsible investing (PRI), have underlined that financially material ESG considerations must be incorporated into the investment decision-making process.
Furthermore, failing to consider long-term value drivers, which include ESG problems, in investment practice is commonly regarded a violation of fiduciary obligation.
ECONOMIC PERSPECTIVE
Negative megatrends (e.g., climate change and resource scarcity) will, over time, produce a drag on economic development as fundamental inputs, such as water, energy, and land, become increasingly scarce and expensive and the prevalence of health and income inequities increases.
The Financial Stability Board (FSB), an international agency that monitors and provides recommendations concerning the global financial system, has recognized climate change as a potential systemic risk.
The economic ramifications of environmental difficulties (such as climate change, resource shortages, biodiversity loss, and deforestation) and social challenges (such as poverty, income inequality, and human rights) are increasingly being recognised.
The Stockholm Resilience Centre has identified nine ‘planetary boundaries’ within which humanity can continue to develop and thrive for generations to come, but in 2017 found that four — climate change, loss of biosphere integrity, land system change, and altered biogeochemical cycles — had been crossed.
A popular theory that builds on that of planetary borders is called ‘doughnut economics’, which blends planetary boundaries with the complementing concept of social limits.
Perspectives for Adhering to Good Practices in ESG
There are a range of viewpoints on the purpose and value, both to investors and to society more broadly, on integrating ESG factors into investing decisions. We will explore those perspectives in the next sections.
Risk Perspective
According to the World Economic Forum’s (WEF) top global hazards, climate now tops the risk agenda.
In 2015, Mark Carney, then Governor of the Bank of England and head of the Financial Stability Board, in a speech to financial regulators that became a cornerstone for the integration of climate change, referred to climate change as the tragedy of the horizon. In his annual letter to chief executives in 2020, Larry Fink, the CEO of BlackRock, announced that the investment firm would step up its assessment of climate change in its investment research since climate change was altering the world’s financial system.
In a parallel letter to its clients, BlackRock committed to divesting from its actively managed portfolios any companies that generate more than 25% of their revenues from coal production and to requiring reporting from investee companies on their climate-related risks and plans for operating under the goals of the Paris Agreement to limit global warming to less than 2°C (3.6°F) above pre-industrial levels.
Fiduciary Duty and Economic Perspectives
FIDUCIARY DUTY PERSPECTIVE
In the current investment system, financial institutions or individuals, known as fiduciaries, manage money or other assets on behalf of beneficiaries and investors. Beneficiaries and investors rely on these fiduciaries to serve in their best interests, which are often defined purely in financial terms.
Because of the misunderstanding that ESG elements are not financially relevant, some investors have used the concept of fiduciary obligation as an excuse to not include ESG issues. But increasingly, academic studies and work performed over the past decade by progressive investing associations, such the Principles for Responsible investing (PRI), have underlined that financially material ESG considerations must be incorporated into the investment decision-making process.
Furthermore, failing to consider long-term value drivers, which include ESG problems, in investment practice is commonly regarded a violation of fiduciary obligation.
ECONOMIC PERSPECTIVE
Negative megatrends (e.g., climate change and resource scarcity) will, over time, produce a drag on economic development as fundamental inputs, such as water, energy, and land, become increasingly scarce and expensive and the prevalence of health and income inequities increases.
The Financial Stability Board (FSB), an international agency that monitors and provides recommendations concerning the global financial system, has recognized climate change as a potential systemic risk.
The economic ramifications of environmental difficulties (such as climate change, resource shortages, biodiversity loss, and deforestation) and social challenges (such as poverty, income inequality, and human rights) are increasingly being recognised.
The Stockholm Resilience Centre has identified nine ‘planetary boundaries’ within which humanity can continue to develop and thrive for generations to come, but in 2017 found that four — climate change, loss of biosphere integrity, land system change, and altered biogeochemical cycles — had been crossed.
A popular theory that builds on that of planetary borders is called ‘doughnut economics’, which blends planetary boundaries with the complementing concept of social limits.
Large institutional investors have assets, which due to their scale, are widely diversified across all industries, asset classes, and locations. As a result, their portfolios are sufficiently representative of global capital markets that they effectively own a slice of the total market. Their investment returns are consequently dependent on the continuous excellent health of the overall economy.
Inefficiently allocating capital to companies with strong negative externalities can affect the profitability of other portfolio companies and the overall market return. It is in their advantage to act to decrease the economic risk offered by sustainability challenges to improve their whole, long-term financial performance.
Impact, Ethics, Client, and Regulatory Perspectives
Impact and Ethics Perspective
Another rationale for adopting responsible investment is some investors’ idea that investments may, or should, help society alongside delivering financial gain. This attitude translates into emphasizing on investments with a positive impact and/or avoiding those with a negative impact.
Client Perspective
Clients are increasingly seeking for greater transparency about how and where their money is invested. This is motivated by the following:
Growing awareness that ESG considerations influence firm value, returns, and reputation
Increasing focus on the environmental and social implications of the enterprises in which they have invested
Regulatory Perspective
Regardless of their ideas or convictions, some investors are being obliged to increasingly examine ESG problems. following the mid-1990s, responsible investment regulation has increased dramatically, with a boom in policy interventions following the 2008 financial crisis. Regulatory change has also been spurred by an awareness among national and international regulators that the financial sector may play an essential role in tackling global concerns, including as climate change, modern slavery, and tax dodging.
Benefits of Adhering to Good Practices in ESG
One of the key motivations for ESG integration is the awareness that ESG investing can decrease risk and boost returns since it examines additional risks and injects new and forward-looking insights into the investment process.
Reduced Cost and Increased Efficiency
Sustainable business methods increase efficiencies by preserving resources, decreasing expenses, and boosting production. Significant cost reductions can emerge from improving operational efficiency through improved management of natural resources, such as water and energy, as well as from avoiding waste.
Consider the impact of Unilever’s (UL:NYSE) eco-efficiency plan. Since 2008, Unilever avoided more than GBP639 million of energy expenditures, saved more than GBP106 million by improving water efficiency in their plants, and lowered costs by roughly GBP106 million by using fewer resources and producing less waste.
Reduced Risk of Fines and State Intervention
Amid rising knowledge of climate change, dwindling energy resources, and environmental effect, state and federal government agencies are establishing legislation to safeguard the environment. Integrating sustainability into a business will position it to anticipate changing requirements in a timely manner.
For example, a 2019 UN Environment Programme report revealed that there has been a 38-fold rise in environmental regulations placed in place since 1972. The greatest corporate fine to date was issued against BP (BP:NYSE) in the wake of the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, the largest in history. BP settled with the US Department of Justice for USD20.8 billion in 2016; the total compensation ultimately paid out by the business reportedly topped USD65 billion.
Reduced Negative Externalities
The term ‘externalities’ refers to circumstances in which the production or use of products and services creates costs or advantages to others that are not represented in the prices charged for them. In other words, externalities include the consumption, production, and investment decisions of organizations (and individuals) that affect others not directly participating in the transactions.
In the instance of pollution, a polluter makes judgments based on solely the direct cost and profit potential involved with production and does not consider the indirect costs to those afflicted by the pollution. These indirect costs, which are not borne by the producer or consumer, may include poorer quality of life, increased healthcare costs, and forgone production opportunities — for example, when pollution impairs business operations, such as tourism.
Improved Ability to Benefit from Sustainability Megatrends
There are a plethora of ramifications from the so-called sustainability megatrends. Some of the megatrends that investors are increasingly concentrating on include the following:
Urbanisation
Technological innovation
Demographic change and wealth inequality
Climate change and resource scarcity
Being able to integrate a response to these trends into business operations might be a success element for an investee organization. From the investment standpoint, these megatrends can be part of a successful portfolio construction approach.
Therefore, business leaders, investors, economists, and governments are increasingly recognising the economic implications of social challenges (such as increasing income inequality and addressing poverty and human and labour rights abuses) and environmental issues (such as climate change, biodiversity loss, and resource scarcity).
Challenges in Integrating ESG
ESG investing has undergone remarkable progress in recent years, yet barriers still remain to its further growth.
Some investors still doubt if considering ESG problems may add value to investment decision making despite wide-spread dissemination of studies suggesting that ESG integration can assist control volatility and boost returns.
Interpretations of fiduciary obligation are partially tied to the perception of the impact of ESG investment on risk-adjusted returns. Despite regulators in several jurisdictions articulating a modern conception of fiduciary obligation, contrasting perspectives continue as to how ESG integration fits in with institutional investors’ duties. Some institutional investors remain unwilling to modify their governance processes because they see a conflict between their responsibilities to defend the financial interests of their beneficiaries and the inclusion of ESG factors.
The difficulty is not just regarding the impact of ESG investing on portfolio returns.
Screening, divestment, and theme investment methods entail ‘tilting’ the portfolio towards desirable ESG qualities by over- or under weighting sectors or firms that either perform well or poorly in those areas. Institutional investors may believe that this contradicts with their responsibilities to invest sensibly because it requires departing from established market standards.
Despite the obstacles and concerns, there is a growing acceptance in the financial industry and in academics that ESG considerations indeed influence financial performance. An examination of more than 2,000 academic research on how ESG elements affect business ;financial performance found an overwhelming percentage of positive outcomes, with just 1 in 10 revealing a negative association.1 Various research results also indicate that engaging with firms on ESG concerns can produce value for both investors and corporations by driving improved ESG risk management and more sustainable business practices. These results give evidence that ESG problems can be financially material to companies’ performance and potentially to alpha.
Challenges Prior to Wanting to Implement ESG –
Challenges prior to incorporating ESG considerations include the following:
The perception that incorporating ESG elements may have a negative influence on investment performance.
The interpretation that fiduciary duty hinders investors from integrating ESG.
The advice supplied by investment consultants and retail financial advisers has many times not been supportive of solutions that integrate ESG.
Challenges Faced After the Decision to Implement ESG
Challenges faced when deciding to apply ESG include the following:
A lack of awareness of how to construct an investment mandate that successfully supports ESG or lack of understanding of the needs of asset owners about ESG.
The impression that considerable resources, which may be missing in the market or may be pricey, are needed. These include human resources, technical capabilities, data, and tools.
A gap between marketing, commitment, and delivery of funds regarding ESG performance
Inefficiently allocating capital to companies with strong negative externalities can affect the profitability of other portfolio companies and the overall market return. It is in their advantage to act to decrease the economic risk offered by sustainability challenges to improve their whole, long-term financial performance.
Impact, Ethics, Client, and Regulatory Perspectives
Impact and Ethics Perspective
Another rationale for adopting responsible investment is some investors’ idea that investments may, or should, help society alongside delivering financial gain. This attitude translates into emphasizing on investments with a positive impact and/or avoiding those with a negative impact.
Client Perspective
Clients are increasingly seeking for greater transparency about how and where their money is invested. This is motivated by the following:
Growing awareness that ESG considerations influence firm value, returns, and reputation
Increasing focus on the environmental and social implications of the enterprises in which they have invested
Regulatory Perspective
Regardless of their ideas or convictions, some investors are being obliged to increasingly examine ESG problems. following the mid-1990s, responsible investment regulation has increased dramatically, with a boom in policy interventions following the 2008 financial crisis. Regulatory change has also been spurred by an awareness among national and international regulators that the financial sector may play an essential role in tackling global concerns, including as climate change, modern slavery, and tax dodging.
Benefits of Adhering to Good Practices in ESG
One of the key motivations for ESG integration is the awareness that ESG investing can decrease risk and boost returns since it examines additional risks and injects new and forward-looking insights into the investment process.
Reduced Cost and Increased Efficiency
Sustainable business methods increase efficiencies by preserving resources, decreasing expenses, and boosting production. Significant cost reductions can emerge from improving operational efficiency through improved management of natural resources, such as water and energy, as well as from avoiding waste.
Consider the impact of Unilever’s (UL:NYSE) eco-efficiency plan. Since 2008, Unilever avoided more than GBP639 million of energy expenditures, saved more than GBP106 million by improving water efficiency in their plants, and lowered costs by roughly GBP106 million by using fewer resources and producing less waste.
Reduced Risk of Fines and State Intervention
Amid rising knowledge of climate change, dwindling energy resources, and environmental effect, state and federal government agencies are establishing legislation to safeguard the environment. Integrating sustainability into a business will position it to anticipate changing requirements in a timely manner.
For example, a 2019 UN Environment Programme report revealed that there has been a 38-fold rise in environmental regulations placed in place since 1972. The greatest corporate fine to date was issued against BP (BP:NYSE) in the wake of the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, the largest in history. BP settled with the US Department of Justice for USD20.8 billion in 2016; the total compensation ultimately paid out by the business reportedly topped USD65 billion.
Reduced Negative Externalities
The term ‘externalities’ refers to circumstances in which the production or use of products and services creates costs or advantages to others that are not represented in the prices charged for them. In other words, externalities include the consumption, production, and investment decisions of organizations (and individuals) that affect others not directly participating in the transactions.
In the instance of pollution, a polluter makes judgments based on solely the direct cost and profit potential involved with production and does not consider the indirect costs to those afflicted by the pollution. These indirect costs, which are not borne by the producer or consumer, may include poorer quality of life, increased healthcare costs, and forgone production opportunities — for example, when pollution impairs business operations, such as tourism.
Improved Ability to Benefit from Sustainability Megatrends
There are a plethora of ramifications from the so-called sustainability megatrends. Some of the megatrends that investors are increasingly concentrating on include the following:
Urbanisation
Technological innovation
Demographic change and wealth inequality
Climate change and resource scarcity
Being able to integrate a response to these trends into business operations might be a success element for an investee organization. From the investment standpoint, these megatrends can be part of a successful portfolio construction approach.
Therefore, business leaders, investors, economists, and governments are increasingly recognising the economic implications of social challenges (such as increasing income inequality and addressing poverty and human and labour rights abuses) and environmental issues (such as climate change, biodiversity loss, and resource scarcity).
Challenges in Integrating ESG
ESG investing has undergone remarkable progress in recent years, yet barriers still remain to its further growth.
Some investors still doubt if considering ESG problems may add value to investment decision making despite wide-spread dissemination of studies suggesting that ESG integration can assist control volatility and boost returns.
Interpretations of fiduciary obligation are partially tied to the perception of the impact of ESG investment on risk-adjusted returns. Despite regulators in several jurisdictions articulating a modern conception of fiduciary obligation, contrasting perspectives continue as to how ESG integration fits in with institutional investors’ duties. Some institutional investors remain unwilling to modify their governance processes because they see a conflict between their responsibilities to defend the financial interests of their beneficiaries and the inclusion of ESG factors.
The difficulty is not just regarding the impact of ESG investing on portfolio returns.
Screening, divestment, and theme investment methods entail ‘tilting’ the portfolio towards desirable ESG qualities by over- or under weighting sectors or firms that either perform well or poorly in those areas. Institutional investors may believe that this contradicts with their responsibilities to invest sensibly because it requires departing from established market standards.
Despite the obstacles and concerns, there is a growing acceptance in the financial industry and in academics that ESG considerations indeed influence financial performance. An examination of more than 2,000 academic research on how ESG elements affect business ;financial performance found an overwhelming percentage of positive outcomes, with just 1 in 10 revealing a negative association.1 Various research results also indicate that engaging with firms on ESG concerns can produce value for both investors and corporations by driving improved ESG risk management and more sustainable business practices. These results give evidence that ESG problems can be financially material to companies’ performance and potentially to alpha.
Challenges Prior to Wanting to Implement ESG –
Challenges prior to incorporating ESG considerations include the following:
The perception that incorporating ESG elements may have a negative influence on investment performance.
The interpretation that fiduciary duty hinders investors from integrating ESG.
The advice supplied by investment consultants and retail financial advisers has many times not been supportive of solutions that integrate ESG.
Challenges Faced After the Decision to Implement ESG
Challenges faced when deciding to apply ESG include the following:
A lack of awareness of how to construct an investment mandate that successfully supports ESG or lack of understanding of the needs of asset owners about ESG.
The impression that considerable resources, which may be missing in the market or may be pricey, are needed. These include human resources, technical capabilities, data, and tools.
A gap between marketing, commitment, and delivery of funds regarding ESG performance