Social Inclusion & Human Rights

To Tackle Racial Inequality, Investors Look in the Mirror

Many believe that the US economy does not provide equal opportunity for all. Sixty-three percent of American adults polled by the Pew Research Center said the legacy of slavery is still felt “a great deal” or “a fair amount,” and 45% said the US has not made sufficient progress toward equal rights.

Those views are borne out by data on racial inequality. The unemployment rate for black Americans is roughly twice the rate for white Americans. And over the course of their career, a white worker typically earns $1 million more than a black worker, McKinsey reports.

Income disparities perpetuate the racial wealth gap, resulting in lower black homeownership rates and the 10-to-1 ratio between the average white family’s wealth and the average black family’s wealth. McKinsey estimates that if the racial wealth gap were to close, the US economy could gain up to $1.5 trillion.

The effects of racial injustice are far-reaching, and they cannot be solved by any one initiative or investor. That said, impact investors are making a difference on a smaller scale, and their efforts can add up. At the same time, the investment community is paying increasing attention to the racial biases within its own walls.

Impact Investors Respond to Racial Inequality

Impact investors have found several ways to use their resources to help create better economic outcomes for minority communities. One way is to invest in companies that have assembled diverse workforces. OpenInvest developed an indexing tool that allows investors to conduct positive screens and select companies that disclose data on racial diversity in their workforces or that set diversity targets for hiring. Investors can also perform negative screens to avoid investing in companies that have shown a lack of commitment to corporate diversity.

Investors may also choose to fund startups led by underrepresented founders. For example, Harlem Capital Partners has committed to back 1,000 founders from diverse backgrounds during the next two decades. Camelback Ventures‘ mission is to support “early-stage underrepresented entrepreneurs with the aim to increase individual and community education, and generational wealth.” Meanwhile, the Wisdom Fund offers loans and free coaching to women of color entrepreneurs. The fund is also researching barriers of access to capital that marginalized entrepreneurs face in the hopes of tackling these barriers as it scales up.

Impact investors have found several ways to use their resources to help create better economic outcomes for minority communities.

Another approach is to invest in companies that create products or services benefiting underserved populations or that help close critical gaps in infrastructure. For example, the California Endowment brings together private and public capital to fund urban agriculture, wellness centers, and other initiatives that contribute to neighborhood health and well-being. Lumina Foundation invests in companies that provide online educational services for job skills and literacy. Other investors focus on backing community development financial institutions, which can counteract economic disparities by offering financial products like home mortgages and by financing needed infrastructure like affordable housing and medical centers.

Finally, investors may divest from companies they see as harming communities of color and low-income communities, such as private prison operators, payday lenders, and gun manufacturers, as the Brooklyn Community Foundation did in 2016.

Confronting Bias within the Asset Management Industry

Still, as investors look for ways to promote racial justice, some have noted that the investment industry itself is not immune to systemic biases. A survey of asset management firms in the US by FundFire and the Money Management Institute found that only 3.7% of managing directors, 2.5% of portfolio managers, and 3% of analysts were Hispanic or Latino; 1.4% of managing directors, 1.5% of portfolio managers, and 2% of analysts were black or African American.

Many of those who make it into these positions must fight an uphill battle to see their work recognized. As Pensions & Investments reports, research shows that black fund managers face biases in performance evaluations, even when their accomplishments are on par with those of top-performing white male fund managers.

Systemic biases also have implications on how capital is allocated. Research shows that frequent investor biases disadvantage minority managers as the latter try to win assets and oversee capital. In fact, people of color and women manage less than 1.3% of assets under management. Investors may overlook opportunities and innovative companies may miss out on funding because capital is, in part, being allocated according to bias rather than objective merits.

Some organizations are acknowledging the problem and taking first steps toward addressing systemic racism in the financial services industry. For example, investment consultant NEPC announced new goals of increasing diverse managers’ share by 67% by the end of 2021 and conducting more meetings with diverse firms. Startup accelerator Founders Factory says that it uses an artificial intelligence system to help select entrepreneurs without bias based on race or background, according to Mission Investors Exchange. Moreover, Illumen Capital makes its investments in funds conditional on staff participating in implicit bias trainings to identify potential prejudices and learn how to correct them.

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