Social Inclusion & Human Rights

Changing Racial Demographics Are Driving Racial Equity Investment

The racial justice protests led by the Black Lives Matter network after the murder of George Floyd are forcing everyone, including investors, to rethink the values reflected in their decisions.

For investors, this reckoning is not just about recognizing and righting the historical wrongs that have created a racial wealth gap and continually pushed people of color to the economy’s margins. It is also about making investment decisions with an eye toward the changing racial demographics in the US, which will soon make people of color a dominant voice in the US economy. By 2042, the US population will be majority-minority, with those who identify as Hispanic, Black, Asian, American Indian, Native Hawaiian and Pacific Islander altogether outnumbering white Americans; those groups will comprise the majority of working-age Americans even earlier, by 2039. In the US, people of color also skew younger, giving their consumer habits and business ideas the potential to shape long-term trends.

These changing racial demographics in the US require investors to think with a racial equity lens about the current and future use of their capital, including investments in racially diverse fund managers, companies, and models and strategies that reach Black and other minority consumer groups.

How Is Black Buying Power Changing?

Black buying power was worth $1.4 trillion in 2019, higher than the gross domestic product (GDP) of Mexico. Since 2000, it has grown at a faster rate than white buying power and is expected to reach $1.8 trillion by 2024. This growth is in spite of the fact that the median net worth of white households is roughly 10 times that of Black households.

Imagine the sort of growth Black buying power might see if the racial wealth and earnings gaps were actually closed. A study by the WK Kellogg Foundation estimates that closing the racial earnings gap in the US would generate an additional $2.7 trillion in GDP today and an additional $8 trillion in GDP by 2050.

As the authors of a 2017 FSG-PolicyLink study put it, “Thirty years ago, our economy could find sources of growth even as it marginalized the people of color who made up a smaller share of our customers, employees, and suppliers. Can it continue to grow in the same ways when people of color become the majority? We think not.”


To learn more about investing in racial equity, read Racial Equity Investing: Opportunities for Impact & Alpha.


How Are Investors Approaching Racial Equity?

How can investors target their capital to a racially diverse consumer base? For starters, they can invest in companies and startups with diverse leadership, and push their portfolio companies to promote and hire more people of color. This is not just a feel-good exercise—the benefits can be financially tangible. A 2017 McKinsey study found that companies with the most racially diverse executive teams or boards are, respectively, 33% or 43% more likely to generate returns above their industry’s national median. Though correlation does not mean causation, an earlier McKinsey study found that company earnings before interest and taxes increased by 0.8% for every 10% increase in racial and ethnic diversity on their executive teams.

Investors can also make investments in early-stage enterprises led by people of color. Many investors and firms announced plans to do this in the wake of June’s protests, but the need goes beyond one particular moment. Because of the racial wealth and earnings gaps, entrepreneurs of color often cannot raise adequate funds from a friends-and-family round. As a result, many good ideas die on the vine. Firms like Harlem Capital Partners are tackling this challenge head on by making seed-stage investments of $500,000 to $1 million in diverse entrepreneurs from their first $40 million fund. Atlanta-based Collab Capital is also looking for early-stage investments in Black-led companies; they have an explicit mission to “establish a new institution that provides a viable pathway to sustained wealth for the Black community,” noting that most Black wealth is first-generation, earned outside of tech and other future-facing industries.

In the wake of June’s protests, many investors and firms announced plans to make investments in early-stage enterprises led by people of color, but the need goes beyond one particular moment.

Investing in racial equity results in leadership and business—the tapping of previously untapped markets. Rihanna’s Fenty Beauty is a perfect example; her makeup line with an expanded palette for skin tones led to $100 million in sales within the first 40 days of the line’s 2017 launch. By 2019, the overall operation was valued at $3 billion. These numbers are well outside the norms for celebrity-fronted beauty ventures, and beauty is just one industry ripe for diverse disruption.

As a growing number of investors are recognizing, shifting racial demographics mean that people of color will continue reshaping American society to reflect the wants, needs, and values of a more diverse set of experiences.

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