ESG Investing

Financial Literacy May Help Close Racial Equity Gaps


Amid other areas of progress in racial equity, the racial wealth gap remains unrelentingly wide. A 2019 survey from the Federal Reserve found that the median white family had $188,200 in wealth versus just $24,100 for the median Black family.

One factor among many driving this disparity is a lack of financial education in schools, particularly those in communities of color. Addressing financial literacy may help narrow racial equity gaps and support the long-term prospects of Black, Indigenous, and people of color (BIPOC) in underserved communities.

Tracking Racial Gaps in Financial Literacy

The United States as a whole suffers from a lack of financial education. Only 21 states require high school students to take a personal finance course as of 2020. In turn, most students enter their adult lives without any training on credit cards, loans, budgeting, or retirement plans. However, parsing the figures by race reveals that only 7.4% of students of color must pass a personal finance class to graduate high school, compared with 12% of white students.

Gaps in financial education perpetuate gaps in financial knowledge—and they can have a negative long-term impact on a person’s overall financial health. The results of a 2019 quiz on key financial concepts revealed that only 28% percent of Black respondents answered more than half the questions correctly; the same was true of 62% of white test-takers. One 2018 study also found that 68% of Black Americans engage in expensive credit card behaviors, such as paying the minimum, versus just 36% of white Americans.

Gaps in financial education perpetuate gaps in financial knowledge—and they can have a negative long-term impact on a person’s overall financial health.

Working to Improve Financial Literacy

Multiple studies show that improving financial literacy leads to improved financial wellness. For instance, students with personal finance education under their belts have been found to be less likely to use payday loans and more likely to see positive asset accumulation by age 25. They were also more likely to apply for college financial aid, which led to an average $1,300 reduction in student loan debt per borrower.

Three years after Georgia, Idaho, and Texas launched personal finance classes in school, all of them saw a state-wide improvement in credit scores and reductions in severe delinquencies on loan payments. Positive developments such as these have caught the attention of other state governments as well. Twenty-five states have introduced personal finance education legislation in 2021, and Florida appears poised to pass it soon. Others including the District of Columbia debate whether to do the same as they fight local racial disparities.

Targeting Avenues of ESG Support

Impact investors can take opportunities to support financial literacy. For example, nonprofit Next Gen Personal Finance provides free training and materials related to personal finance for schools and teachers. BlackFem targets financial education in schools to help Black girls and girls of color in underserved communities build wealth. The field of EdTech offers another frontier for closing racial equity gaps as companies create digital solutions to support education in a range of subjects, including personal finance.

ESG investors might also consider screening out investments in predatory services like payday lenders in favor of shifting their portfolios toward regional banks that support communities of color, as these banks can provide financial resources and advice to local residents in a way that may resonate more. Underserved communities can also benefit from better access to financial resources such as checking accounts, ATMs, mortgages, and other bank services.

Finding a Brighter Financial Future

Managing money is a critical yet undertaught skill set, and that reality has hampered the advancement of many students’ personal financial goals as well as larger-scale racial and gender equity goals. By working alongside underserved communities as they build the foundations of long-term financial literacy, impact investors can offer critical support meant to reach generations to come.

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