1. Diversity is a top priority for investment decisions. Asset owners recognize the importance and impact of incorporating diversity into investment decisions, with diversity and inclusion becoming an even higher priority over the last year.

According to poll results, D&I is the top environmental, social and governance factor that asset owners consider for their organizations' investment decisions, and 89 percent of asset owners say that the diversity of external managers specifically is important or a top priority.

Asset owners appear to be putting this prioritization into practice, with 67 percent saying their organizations have policies that incorporate diversity as part of an ESG requirement for making investment decisions.

2. Perceived financial trade-off presents a hurdle. Despite the prioritization of diversity and recognition that diversity can improve investment performance, most asset owners say that incorporating diversity into their investment decisions comes at the expense of returns.

A majority (56 percent) of asset owners agree that they must choose between financial gains and incorporating diversity into their investment decisions, revealing there may be deep-seated skepticism about diverse external managers yielding strong returns.

There is a sizable perception gap by race, with 70 percent of white asset owners agreeing, compared to just 35 percent of multicultural asset owners.

3. Public pension funds are leading the way. The industry can look to public pensions for evidence of impact and inspiration for how to diversify external managers. Public pension funds are much more likely than their peers to value diversity in investment decisions, perhaps due in part to their own diversity and longer exposure to diverse investment teams.

The public pension fund asset owners surveyed are more diverse by gender and race compared to other types of asset owners. Further, nearly half of public pension fund asset owners say the diversity of investment teams has always been a priority for their organizations, compared to 7 percent of other asset owners.

4. More accountability is needed. There is room for more formalization, standardization, best practice sharing and accountability measures when it comes to diversifying external managers.

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

Morgan Stanley offers several recommendations for asset owners moving forward:

• Publish industrywide data highlighting returns from diverse external managers.
• Showcase real-world financial benefits of using emerging manager programs to identify new opportunities with newer, smaller and more diverse investment management firms.
• Establish standardized practices to formally track external managers' progress on meeting diversity targets and to hold them monetarily accountable for failing to reach targets.
• Encourage asset owners to instill additional transparency measures around how much of their own organizations' assets under management are invested with diverse external managers.
• Elevate leaders who have shown a commitment to investing the time, resources and effort into creating meaningful change around diversity within the organization, including instituting formal policies.

Require consultants to maintain a list of diverse managers for consideration, similar to the way corporations require recruiting agencies to present diverse candidates for senior positions.

"Our research shows that asset owners consider diversity and inclusion to be the top ESG factor regarding their organizations' investment decisions, and there is a near consensus that more diverse investment teams help yield strong financial returns," the report said.

"However, the different approaches that asset owners (and the external investment teams they hire) can take toward diversity can have a significant impact on what percentage of their billion-dollar portfolios are invested in women and multicultural-founded companies, which often face structural barriers to attract funding."

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