Deborah Adeyanju, CFA, Senior Financial Planner & Impact Strategist
Not so long ago it would have been difficult to hear the words racial equity and investing mentioned in the same sentence. In recent years though, as has been the case with other categories of sustainable/ESG and impact investing strategies — think climate change, disarmament, energy, and women's rights — professional investors are increasingly not just talking about it but starting to explicitly consider racial equity as an investable theme. At the same time, their clients are placing more and more emphasis on leveraging their investing dollars to promote greater racial equity.
It should go without saying, but racial equity investing as distinct from gender lens and other focused investing strategies, is aimed at addressing the specific disparities that Blacks and other racial minorities face in health, wealth, educational, and employment prospects, in their lived realities as well as in their exposure to, and treatment within, the criminal justice system — to name just a few. The simple truth is that “in the U.S., one must not assume that if you have achieved some measure of financial success, the problems, concerns, and issues Black households encounter are ones in which class dominates rather than race.” This is also true for other communities of color.
Last year’s racial reckoning in the wake of George Floyd’s murder and the protests that followed it certainly accelerated and expanded general interest, but investors’ desire to use their wallets to drive greater racial equity has been building for some time. Together, these developments mean racial equity investing is coming into sharper focus.
But in order to be effective we need to be clear on what we mean by racial equity investing. A new and important report from the Croatan Institute shares its working definition as: “the practice of redirecting capital to support communities of color with an explicit objective of increasing financial and economic inclusion and dismantling systemic and institutional racism, both in measurable ways.”
Racial equity investing strategies
Using that definition as a framework, what does racial equity investing actually look like in practice? It can take several different forms.
#1 Committing investment capital to funds managed by diverse asset managers. The Diverse Asset Management Project Firm Assessment found, to put it mildly, “women and minorities were dramatically underrepresented in mutual funds, hedge funds, private equity (PE), and real estate.” Numerous other studies bear this out. Unfortunately this is true despite studies that￼ show diverse-owned and managed firms perform at least as well as white-owned ones.1 So one way to drive greater equity in capital allocation is to seek out and invest with ￼Black and brown investment managers.
#2 Investing directly in businesses owned by Blacks and other underrepresented minority groups. Supporting Black businesses can achieve multiple aims that actively benefit communities of color by: offering needed goods and services, providing employment opportunities, expanding access to wealth generation for Black households, and growing the overall economy.2
#3 Investing in firms that are leading the way in recruitment, retention and promotion of employees of color. Changing the face of corporate America to be more reflective of the U.S. population will yield benefits on multiple levels: companies that reflect the diversity of the country are better able to market to different consumer segments; they make better decisions, and have better financial returns.
#4 Investing in securities: public equities, fixed income instruments (bonds, loans, and notes), and alternative/private vehicles. Opportunities to do this are growing in number from Certified B Corporations to individual funds to Community Development Financial Institutions (CDFIs) and investment platforms that expand access to capital specifically for people of color.
#5 Engaging in￼ shareholder activism. Whether it takes the form of placing initiatives on the ballot, launching proxy battles, or voting with your feet by divesting, raising concerns and seeking change through direct engagement with corporate management and the wider shareholder audience, can at the least call attention to issues of equity and highlight ways to address them.
No matter which levers you focus on as an investor, all of these strategies will take some effort to implement. That’s because racial equity investing has not reached the point yet where you can just “set it and forget it.'' Here are a few reasons why. ￼
A lack of data — Whether it comes to basic data on workforce diversity (When Calvert launched its campaign in 2020, only 4% of companies in the Russell 3000 disclosed their full data.) or specific actions they are taking toward greater racial equity, it can be hard to find out which firms are actually making strides versus just paying lip service with hard-to-measure promises or empty pledges.
A lack of investment vehicles — Finding opportunities within public stock markets can be difficult. This is slightly easier to do when investing in debt, but debt markets have traditionally been harder for individual investors to access.
A dearth of metrics — There are not yet standardized and widely accepted yardsticks to measure and compare performance across managers.
GRID’s Racial Equity Lens (REL) Investing Framework
While for many all of this is new, GRID’s focus on racial equity is deeply embedded in our firm’s DNA. We are committed to expanding access to both financial planning and investment opportunities to households of color. Additionally, we work with a client base that reflects America’s diversity, has often directly experienced the impact of racial inequity, and has a strong desire to align its investing with its values around racial equity. Increasingly our institutional clients are also seeking to better align their investment portfolios with their stated missions.
Our approach to racial equity investing starts from our philosophy that racial equity drives alpha.3 In implementing it we:
- center the experiences of women of color by systematically directing investment to companies that support and advance Black women as a critical lever in improving racial equity for all;
- provide households of color with access to credentialed fiduciaries and outperforming investment managers.
The Bottom Line
Why does any of this matter? Can’t it be addressed through other means? Racial inequity imposes an enormous cost to society. A Citi study estimates a negative economic impact of racial inequality to the U.S. economy alone of $16 trillion — over the past two decades. Yes, you read that right! Other studies have found the economic harm to be on a similar scale.
Clearly, it’s not just a matter of “doing good” for goodness’ sake. Given the high stakes, we should be using all means at our disposal to address racial inequity. By intentionally directing their investments to support and advance racial equity, investors have the opportunity to positively impact society while they pursue investment returns.
If you want to learn about our Racial Equity Leaders Strategy, please contact us at email@example.com.
GRID 202 Partners is an African-American and woman-owned Registered Investment Adviser (RIA) specializing in fee-based, comprehensive financial and investment planning for individuals, couples, businesses and institutions. We serve successful, ambitious professionals and business owners, mission-driven organizations, and households that are committed both to creating wealth for themselves and future generations and to aligning their financial assets with their social impact objectives.