In “Learn About Race Equity Investing” we shared how to get started with a declaration of anti-racism. Now we share actions needed to move the needle on racial justice.
Institutional investors are focused on promoting anti-racism. The WK Kellogg Foundation, Robert Toigo Foundation, JPMorgan Chase Foundation, and John Rogers, Jr. Internship Program in Finance are several organizations supporting talented young people of color to enter investment roles.
Here’s How Investors are Advancing Racial Justice through Portfolio Building
- Portfolio Manager selection. Manager diversity is connected with outperformance. A 2019 study by Harvard found funds managed by minority-owned firms were overrepresented in the top-performing quartile of private equity (PE) funds. Comparably, the National Association of Investment Companies (NAIC) analysis of diversity returns found diverse PE funds outperformed median US PE funds. Investors may wish to hire minority-owned managers or managers with both various teams to help foster more diversity. NAIC, Diverse Asset Managers Initiative, New America Alliance, National Association of Securities Professionals, and Association of Asian American Investment Managers are all organizations focused on diversity-owned managers.
- Strategic engagement. Diversity on corporate boards can drive higher performance. The Carlyle Group found that each diverse board member is associated with a 5% increase in annualized earnings growth within its portfolio. As a result, many institutional investors promote corporate board diversity. Investors also motivate companies in their portfolios to administer anti-racist training, amplify the focus on diversity in recruiting and retaining employees, and implement pay equity, a living wage, and supplier policies. Harvard Business Review suggests companies require at least two minorities or women in the pool of job candidate finalists is critical. Likewise, closing the racial gaps in income could increase US GDP by 14%.
- Impact of investing. Impact investing consulting firm Cornerstone Capital Group highlights investment approaches in three strategic solution areas: income disparities, access to affordable housing, and access to more capital. Cornerstone Capital works with regard to income disparity suggests investors could target companies with healthy diversity hiring and supply chain practices. Likewise, Capital One Impact Initiative received a $200 million commitment to close the gap on wealth disparities. To promote affordable housing, investors might also consider affordable housing market options like real estate investment trusts (REITs), private equity funds, or mortgage-backed securities (MBS). Kresge Foundation recommended, “investors may opt to invest in businesses serving vulnerable demographics or make deposits in Black-owned banks or community banks in communities of color” to build more capital. Look at New York-headquartered banks Carver Federal Savings Bank in Harlem and FDIC-insured community bank Spring Bank in the South Bronx for two examples.
- Negative screens. Likely the more popular approach to investing, because it is a slightly more convenient way of narrowing the landscape, involves excluding investments that exacerbate racial injustices. For example, guns and private prisons unreasonably harm disadvantaged minorities. Black-owned investment firm Robasciotti & Philipson printed a racial justice vetting system for publicly traded companies. The publication recommends excluding prison involvement, money bail involvement, immigrant detention, surveillance, for-profit colleges, and occupied territories.
As we look ahead, policymakers and other stakeholders will undoubtedly continue to work to advance racial equity. Therefore, racial justice investing remains an area to watch.
Join the Community Foundation for Palm Beach and Martin Counties for the first series of Impact Investing panels. Sign up for “How Social Issues are Shaping Responsible Impact Investing” on November 11 at 11.30 AM ET, learn more.