Make investment in racial justice matter to your clients
As the anniversary of George Floyd’s death approaches, investor interest in racial justice investment initiatives is growing.
It makes sense, then, that investing in racial justice – a form of socially responsible investing aimed at promoting racial justice, inclusion and diversity – is a growing asset class, in which RIAs and family offices will continue to invest in the values framework. investment philosophy based.
For advisers, this moment revealed an urgent need for rigorous frameworks which allow companies to compare their performance with racial justice indicators. However, getting good data is a complex process as racial inequalities also manifest themselves in the asset management industry and the implicit biases impact the decision-making processes around investment and allocation of funds. capital.
In venture capital, for example, only 6% of investment partners are black or Latino and 1% of venture capital-backed startups have a black founder. Stanford research The study found evidence of racial bias in the investment decisions of asset distributors in that they struggled to assess the competence of diverse racial teams. Such biases impact the way investors rate fund managers, exacerbating the lack of capital to minority investors.
Racial justice investment funds may also seek to exclude companies that exacerbate racial injustice. A vivid example happened in 2016 when Toyota’s finance arm agreed to a settlement of more than $ 20 million to resolve claims by federal regulators that black and Asian borrowers paid more for auto loans than whites. Between 2004 and 2008, disadvantaged minorities with comparable credit scores were more than three times more likely than white borrowers to receive subprime mortgages between and were more than 75% more likely to have negative equity in 2010 (against a similar probability of negative equity in 2005). , according to an article by Ryan Cooper and Matt Bruenig, Foreclosed: Destruction of black wealth during Obama’s presidency. In addition, guns and private prisons disproportionately harm disadvantaged minorities. As a result, investors can choose to exclude financial institutions with abusive lending practices, a subset of the prison industrial complex, or gun manufacturers from their portfolios.
Given these inequalities, what is the most effective way to break down the impact that companies can have on racial justice, and how to quantify the actions of companies through indicators that are relevant, rigorous and meaningful to the priorities of the company? racial justice of various stakeholders? Fortunately, existing approaches provide a basis for comparability. Black-owned investment firm Robasciotti & Philipson, for example, released a racial justice screen for publicly traded companies that excludes involvement in prisons, involvement of financial surety, detention of immigrants, surveillance, for-profit colleges and the occupied territories.
The NAACP was company rating for at least 25 years depending on factors such as C-suite hiring, supplier diversity and community engagement. In 2018, the civil rights organization created its own fund as an ETF (NACP), which today has net assets of over $ 28 million.
More and more, my colleagues and I hear from clients that they want such racial justice investment options. “We are committed to providing support – funding and more – to activists, networks, organizations and movements working for gender equality and racial justice for all,” said Latanya Frett, CEO of the Global Fund for women. “[It’s] an opportunity to do my part to forge systematic and lasting change and transfer resources and power to Black, Indigenous and other communities who have long struggled with violence and who know their community’s needs.
New approaches to investing in racial justice are also emerging that offer additional rigor and nuance. For example, asset manager and investment platform OpenInvest’s Racial Justice Cause incorporates frameworks such as the NAACP, filters metrics such as board member inclusion and reports diversity controversy issues to companies and, leveraging the investment based on the location, the companies that pollute the most in communities of color.
Clients, RIAs and Financial Advisors want to see senior management work harder to promote diversity on the board; more importantly, clients want this reflected in their investment portfolios. Advocates, allies and strategic centers of influence collectively wish to unequivocally support the idea that diversity on boards can lead to outperformance. The Carlyle Group has found that within its portfolio, each diverse board member is associated with a 5% increase in annualized earnings growth. As a result, investors can also encourage companies in their portfolios to administer anti-racism training; put more emphasis on diversity in recruitment and retention; and develop and implement pay equity, living wage and supplier diversity policies.
By way of illustration, research from the Harvard Business Review suggests that the mandate at least two minorities or women in the pool of finalists is critical; a PolicyLink study found that reducing racial income gaps could increase US GDP by 14%. Harvard Business School professor Mark Kramer goes further by suggesting that companies eliminate the box on felony conviction job application forms, which disproportionately excludes people of color. (Some jurisdictions already prescribe it.)
As the industry grapples with the complexity of systemic discrimination and prejudice in the world’s largest and most influential companies, the way forward lies in a flexible approach to making sense of corporate disclosures at through an evolving set of racial justice actions and indicators.
– Additional reporting by Yaser Faheem and Jeeho Bae.