BEYOND INTENTION: THE ROAD TO DEI IS PAVED WITH ACTION

At PNC, diversity and inclusion have been long-standing values, and we remain firm in the values that drive our culture and our behavior, as well as reflect our priorities. We have further expanded that notion to the communities in which we operate with a multi-year, $88 billion pledge to help end systemic racism and support the economic empowerment of minority and low- and moderate-income communities.

We believe PNC is uniquely positioned to contribute as a bank, and our commitment—a combination of philanthropic capital, community development financing, and capital for neighborhood revitalization, consumers, and small businesses—highlights the promise of sustainable finance and responsible investing (RI) for driving positive change in our communities.

Defining DEI

We have evolved our understanding of this commitment to include the notion of equity in our investment management practice. When we looked at diversity, equity, and inclusion (DEI) initiatives across the industry historically, a good deal felt like “check-the-box” exercises for many companies, but at PNC, considerations for DEI in our investment management services are a priority, in our operations and in the investment solutions we provide.

Whether it’s endowments and foundations requesting information on the racial, ethnic, and gender diversity of the fund managers in their portfolios, or individuals and families wanting to incorporate a DEI lens across asset classes, it’s clear that DEI has become a fundamental expectation of investment managers.

To understand how to best integrate DEI factors into our own practices, we have developed a working definition of DEI. At PNC, we define diversity as the presence of differences that make each person unique, and we account for inclusion as the full engagement and development of all employees.

From a corporate perspective, this makes sense, as we have approximately 60,000 employees with rich and different backgrounds.

We can use these descriptions as a foundation to provide a more explicit definition of the types of diversity we are assessing as part of the investment process. In our investment practices, we define DEI as shown in Figure 1.

When we combine these three elements, our DEI investment thesis intentionally seeks investment opportunities in minorities or underrepresented populations in an equitable manner that results in:

• Greater representation of minority-owned investment firms;
• Increased assets under management for minority- run investment strategies; and/or
• Allocating capital toward investment strategies that intentionally consider and engage with investments in the portfolio on DEI criteria.

This working definition allows us to identify the types of data we need to select appropriate investment strategies to effectively craft holistic investment solutions with a DEI lens.

Responsible investing

We believe investment managers should be collecting and reporting on an increased number of diversity metrics to provide investors rich information about the make-up of the firms in which they are investing. Assessing asset management firms and investment strategies on our platform along DEI criteria is regular practice, and combining nonfinancial goals, such as considerations for DEI, with financial objectives reflects our approach to RI.

We see RI as a goals-based strategy, one that can be incorporated into investment portfolios in a variety of ways across asset classes. At PNC, RI generally takes three forms:

• Avoiding harm: excluding or restricting investments based on certain values;
• Benefiting stakeholders: assessing and engaging on environmental, social, and corporate governance (ESG)-related factors; and/or
• Contributing to solutions: defining a specific, targeted impact and allocating capital toward that objective.

In our view, assessing investment strategies and companies on DEI criteria falls squarely in the S category of ESG, with the intent to “benefit stakeholders”.

Over the last decade, traditional financial analysis has been increasingly coupled with the assessment of ESG factors. This process, known as ESG integration, involves assessing how companies are effectively managing risks and/or capitalizing on opportunities related to ESG factors (such as risks resulting from a company’s exposure to climate change or labor controversies involving racial discrimination lawsuits), and companies are reacting to investor assessments of ESG criteria in ways they may not have taken as seriously in the past.

Figure 1: PNC’s definition of DEI

Figure 2: Assessment of DEI criteria using social factors

Figure 3: Stages of diversity management implementation

ESG and DEI

To assess companies along DEI criteria, investors and company management are moving beyond the boardroom to examining and reporting on the S factors of ESG, as shown in Figure 2.

Such factors can provide context for how companies might treat their employees, engage with the communities in which they operate, and provide access to services important for minorities and underrepresented groups.

Assessments of these social factors indicate that investors are going beyond compliance with the law and moving further toward assessing and integrating DEI initiatives as a corporate value. We built on academic research that compares DEI initiatives of different companies to develop our framework for understanding where companies might be on their journey for integrating DEI initiatives.

Figure 3 highlights six stages of diversity management implementation from “no consideration” to “risk mitigation” to DEI for “competitive advantage”.

Figure 4: Constructing portfolios through a DEI lens