Originally published 2.22.2021
Racial justice investing is a form of socially-responsible or impact investing aimed at adding investments that promote racial justice, inclusion, and diversity. The idea is to screen for investments in companies that promote these social goals, which can be accomplished in several ways. These may include, among other tactics, owning shares of black-owned businesses or companies with diversity-hiring mandates, and avoiding investments in companies that disproportionately impact communities of color in negative ways, such as gun makers or operators of private prisons.
Among the motivations behind racial justice investing is to recognize institutional investors’ influence and power in the markets, and that the investor community has contributed to and benefited from structurally racist systems and the entrenchment of white dominance among investors and financial sector employees.
Impact investing, which aims to generate specific benefits that promote social gains, has grown in prominence over the past several years. The point of impact investing is to put money and investment capital to work for the good of society, often targeting traditionally underserved communities or sectors. This can be done by investing, for example, in nonprofits that benefit the community or in clean-technology enterprises that benefit the environment. Impact investing attracts individuals as well as institutional investors including hedge funds, private foundations, banks, pension funds, and other fund managers.
One form of impact investing involves promoting racial justice, equality, and inclusion. Known as racial justice investing, the purpose is to leverage both institutional and retail dollars to invest in ways that advance this and other anti-racist causes. Racial justice investing can take on many forms, including seeking investment in black-owned businesses or startups with founders who are people of color.
Financial firms and institutional investors are also increasingly looking internally to their own practices and employee demographics, signing racial justice pledges and issuing statements to publicize their position. Others are actively fostering racial diversity and inclusion, while also favoring vendors and suppliers that have made similar pledges. According to Forbes, “within their portfolios, institutional investor actions span from promoting board diversity to making investments that support job and wealth creation for underrepresented minorities.”
In 2020, and especially following the social movements that responded to police brutality and killings of unarmed black men in particular, several financial firms signed on to public pledges admonishing persistent racism in America and seeking to use their influence as institutional investors to instead promote diversity, inclusion, and justice.
The 2020 Belonging Pledge, put forth by the group Confluence Philanthropy, seeks the following call to action among its signatories: “We commit to discussing racial equity at our next investment committee meeting. We will move our agenda forward on this. We will share our next steps and results (perhaps privately), so that we can help to identify industry-wide barriers and the technical resources required to advance the practice of investing with a racial equity lens.” As of February 2021, 187 institutional investors, ranging from hedge funds to pensions, have signed on to the Belonging Pledge, representing nearly $1.9 trillion in assets under management (AUM).
A second pledge was issued by RacialJusticeInvesting.org (RJI). Its Investor Statement of Solidarity to Address Systemic Racism and Call to Action states that “As investors, we stand in solidarity with protesters and call for the dismantling of systemic racism and recognize our responsibility to act. We recognize that the investor community has contributed to and benefited from racist systems and the entrenchment of white supremacy… We acknowledge the deep roots of structural racial inequity. Since its founding, the United States’ society and economy have been rooted in racist beliefs and systems designed to extract wealth and maintain the power of a white elite…” This pledge has been endorsed by 186 institutional investors as of February 2021.
Several other pledges that have similar mission statements are also available and gaining signatures from investors large and small.
In addition to signing public pledges and making efforts to diversify and address racial issues internally, institutional investors are also putting their money where their mouth is. This starts by investing in firms owned and operated by people of color, as well as investing with sub-advisors and portfolio managers that have diverse teams. Doing so not only promotes racial justice but also can enhance returns. In fact, a recent research paper authored by Harvard Business School’s Josh Lerner showed that portfolios managed by more diverse firms outperformed their peers, on average. Similarly, the National Association of Investment Companies (NAIC) found that private equity funds with greater diversity outperformed in nearly 80% of vintage years.
Investing in companies with more diverse corporate boards of directors also seems to be a social strategy that yields above-average returns. One recent piece of industry research put out by the Carlyle Group finds that after controlling for industry, fund, and vintage year, companies with more diverse boards generate earnings growth that is five times faster, on average, with each diverse board member associated with a 5% increase in annualized earnings growth.
Other direct actions investors can take to promote racial justice include putting capital into real estate investments, such as REITs, that promote affordable housing or invest in under-served residential communities, making improvements and offering fair terms and rent for their tenants. At the same time, investors may seek to negatively screen out investments that could prove detrimental to the cause of racial justice, for instance in banks known for predatory lending practices or redlining, or that engage in activities that overburden communities of color such as private prisons.
While much of racial justice investing involves actions taken by large institutional investors, individual retail investors can also get involved. In addition to researching and investing in stocks that align with these causes, there is now a racial justice-focused exchange-traded fund (ETF): The Impact Shares NAACP Minority Empowerment ETF (NACP), which is, to date, the only financial product that explicitly addresses issues of racial inequality, doing so with the backing of one of America’s oldest and most prestigious civil rights groups, the NAACP.
The top 10 holdings of NACP, as of February 2021, are: