An Investors' Guide to Investing for Racial Equity: Nine Actions to Take Today
- 2 days ago
- 10 min read
Updated: 7 minutes ago
During the past several years, many of us have been asked to step up to the task of dismantling systemic racism and white supremacy. Many of us are donating to organizations supporting racial justice, and shopping at BIPOC- (Black and Indigenous People of Color) owned businesses near our homes and online. With the most recent rhetoric and attacks, many are supporting the movement for racial equity in all of the ways we know how. Yet, we continue to see widening inequalities.
Most people who identify as investors in the United States are white. We have a long way to go to shift just who sees themselves as an investor, and who has access to investment capital and bank accounts. For those with assets to invest, a starting question might be, “How much is enough?” For those that have more than enough for their own families or organizations, donations in the form of support for BIPOC organizations working on racial justice may be an appropriate first action.
Due to a history of systemic racism and slavery in the U.S., the net worth of a typical white family is ten times that of a Black family, and thus, for many, engaging in wealth redistribution may be a meaningful objective.
To have the historic and ongoing wealth inequality crisis move toward actual transformation, investors can — and must — play a significant role. By adopting a racial equity lens when making investment decisions, we have the power to shift our economy.
Below I have outlined 9 simple steps to incorporate a racial justice lens when making investment decisions. I have also included simple ways to consider a commitment to racial equity within the Investor Policy Statement.
Nine Ways to Incorporate Racial Justice Criteria in Your Investing
1. Count and Add to People of Color in Leadership
Look to ensure that every company in your investment portfolio includes people of color in leadership. There is a need for greater diversity at the board level and in executive leadership regardless of company size. Until recently, the onus has been on non-white men and women to prove that inclusive workplaces represent a solid business proposition. With accumulating research illustrating the benefits of inclusive practices to both companies and their shareholders the right thing to do may also be a smart thing for investors.
In public equities, and many asset classes, white males continue to be overrepresented on boards and corporate executive positions. The good news is that the financial industry changes by client request and demand. With enough of us aware of this issue, and raising this issue, we can make significant progress.
Get Started: Select companies that include people of color in executive management and on the board of directors. If you are working with a financial advisor, ask your advisor to help screen out companies that do not meet your criteria and identify those that do.
Look to add people of color to your own investment team and in all areas of hiring. At Nia Impact Capital, we provide a “Changing the Face of Finance” internship program specifically to train young women and people of color in sustainable finance. Don’t give in to the notion that diverse talent does not exist.
2. Divest from Companies Causing Injustice
Many public equities portfolios, and even private equities, may include companies causing harm. From private prisons, weapons, and firearms, to tobacco and alcohol, to large corporations (like Walmart and McDonalds) that are not actively paying a living wage, make sure you don’t inadvertently hold companies that are actively part of the problem.
Get Started: Check with your financial advisor to make a plan to sell any harmful companies and ask them about how to reinvest that money in solutions-focused companies.
3. Use Your Investor Voice: Activism and Engagement with a Racial Justice Lens
Moving forward in this time when innovation is paramount, all-white, male boards will be questioned and the burden will shift toward these men to justify non-diverse leadership teams. In the meantime, investors can send a strong message by voting with their dollars. Nia Impact Capital invests only in companies that include diversity in leadership. We use our platform and investor voice to share the accumulating research on the benefits of diversity in corporate leadership, encouraging many portfolio companies to increase their gender and racial diversity numbers.
Get Started: Use your platform and investor voice to inform companies of the benefits of diverse leadership, and encourage companies to increase their racial equity practices, including hiring and promotion practices. Be active in speaking up for living wages, access to healthcare benefits and reducing inequalities.
4. Engage Formally and Proactively as an Asset Owner to Achieve Racial Equity
Investors can incorporate a racial justice lens when voting proxies and by using their investor voice to advocate for social justice policies and practices in companies they own. Writing letters to companies and filing shareholder resolutions is an effective way to begin dialog toward greater equality. Nia Impact Capital views the voting of proxy statements as both a shareholder right and a responsibility. From including women and people of color in board leadership, to CEO pay, and workplace equity, Nia uses its investor voice by voting proxy statements in alignment with fair and equitable corporate policies and procedures. If your portfolio managers or financial advisors do not already offer this service connect them to organizations such as As You Sow, a non-profit shareholder advocacy group based in Berkeley, California that has been doing this work since 1992.
Get Started: Vote proxy statements in alignment with fair and equitable corporate practices. For example, vote “NO” on excessive CEO pay and vote “YES” on racial equity audits and on ending forced arbitration for employees.
5. Invest in People of Color Entrepreneurs, Black-Led Investments and Black-Led Funds Across All Asset Classes
Financial inclusion is a significant part of how society can achieve racial equity. According to Crunchbase Black-founded startups in the venture market, receiving less than 0.5% of the total $140.4 billion venture funding for U.S.-based startups in 2023. Impact investors need to check for any biases — including implicit or unconscious bias — to ensure capital gets to people of color-led ventures, and not miss out on potentially successful opportunities by (perhaps inadvertently) excluding many startup businesses. Investors that do not engage in private equity can check with their banks to ensure cash deposits are being used to provide loans to entrepreneurs of color. Additionally, investors can check with any banks and lending companies in which they own stock to ensure these institutions lend to people of color and Black-owned businesses.
And, interesting to note: People of color and women are much more likely to get funded with crowd-sourced, community investments. As Amy Cortese and Arno Hesse, co-founders of Investibule state, “If we want to change who gets funded, we also need to change who does the funding.”
Get Started: Choose funds or investment products managed by Black portfolio managers. When selecting municipal bonds, choose projects that positively impact communities of color or improve the lives of historically disadvantaged populations. Reach out to your financial advisor to ask about Black and women-owned start-up companies for investment.
6. Invest in Businesses that Produce Products and Services that Solve Everyday Problems for (and with) Communities of Color
While providing leadership opportunities to diverse candidates is essential for both a company’s financial bottom line as well as broader societal inclusion goals, as investors and advisors, it is important to select companies that have communities of color in mind. In order to transition to a just, sustainable, and inclusive economy, those companies that are actively innovating on behalf of non-white people need our investment. From avoiding harmful companies (such as oil, gas and extraction, to companies that do not include people of color in leadership) to investing in solutions-focused companies, such as those focused on renewable energy, affordable housing and health care solutions, impact investors can allocate their investment portfolios to invest in a world that works for everyone.
Get Started: Choose companies that produce goods and/or services beneficial to Black communities; purposefully invest in people of color-owned businesses, either by making loans, or by investing in privately held companies.
7. Evaluate Company Employment Policies and Practices
Hiring and board recruitment policies, as well as sexual harassment protocols can have a large impact on company culture. By choosing to invest in companies that embrace diversity goals, as well as inclusive policies and practices, investors can align their dollars with their values while supporting companies that are likely to outperform their competition.
Get Started: Select companies based on their internal policies and practices. This could include hiring practices, board recruitment policies, sexual harassment policies, diversity and inclusion trainings, family leave policies, childcare, and more. Invest only in companies committed to paying a living wage.
When you are selling or donating stock of companies that do not meet your racial equity criteria, communicate that to them so they understand the reasons for the sale and have investor motivation to change.
8. Allocate to People of Color-Led Funds and Work with Diverse Financial Advisors
When selecting wealth management services and investment funds, choose diverse investment advisors and portfolio managers. To change the face of finance moving forward, many of us will need to bring a racial and gender lens to all levels of investment decisions. The good news: diverse managers have been shown to outperform their white male counterparts, so diversifying a portfolio along racial, ethnic and gender lines may serve all parties.
Get Started: Choose to work with diverse-owned investment management firms.
Speaking of asset managers: In 2022, the Knight Foundation continued their series of studies on diversity in asset management. What they continue to find is a severe lack thereof.
Source: Knight Foundation Study of U.S. Managers, 2022
Of huge significance, just over 5% of publicly traded funds are run by women, and less than 4% are run by people of color. Worse than that, due to bias in manager selection and allocation, firms owned by women and minorities combined manage just 1.3% of assets in the $69 trillion asset management industry. This data from the Knight study suggests that 98.7% of all investment decisions are being made by white men. It’s up to investors to shift these numbers by allocating to diverse managers in order to achieve more balance in our economy.
For purposes of the Knight study, “substantial” ownership was determined to be 25% to 49% of a firm, and “majority” was 50% and higher. The financial industry clearly has its work cut out for it in terms of paving the road for possible onramps for diverse managers. Investors can accelerate this much-needed change by signaling the demand and by making allocations to Black-owned funds and firms.
Furthermore, we need investment advisors to serve Black and brown communities, identifying financial services that meet the needs of people of color. The McKinsey Institute for Black Economic Mobility, estimates “that from 2022 to 2030, the financial-services providers that offer more-equitable, more-accessible, and better products and services can win $225 billion in cumulative spending from Black consumers (excluding organic growth).”
9. Move Your Money
Moving your money from a large extracting institution to a local bank, credit union, or Community Development Financial Institutions (CDFI) is one of the most important steps each one of us — those who see themselves as investors or not — can take to solve certain aspects of racial inequality. Check out our blog post that includes 6 steps to move to a local bank or credit union. Plus, Marilyn Waite has published a list of banks that are climate justice friendly.
The Importance of an Investment Policy Statement for Racial Equity Investing
The purpose of an Investment Policy Statement (IPS) is to spell out the goals and stated objectives of any given portfolio, providing direction and parameters for the investment managers. The IPS can serve as a central document, grounding all stakeholders on both the goals, expectations as well as strategies to be used. Oftentimes strategies such as asset class allocations, time horizons, or any constraints are articulated within the IPS. For institutions and pensions, as well as endowments and family offices, the investment policy statement can be used as a market signal, as well as a document sharing expectations with fund providers on just what types of products and assets will be needed.
Increasingly, institutions are seeking to articulate their values in addition to asset allocation goals within their IPS. When adopting new strategies or shifting objectives, the IPS is the place to communicate parameters for investment decisions.
In their latest research report on diversity of asset managers, The Knight Foundation and the Silicon Valley Community Foundation, Tulsa Community Foundation/George Kaiser Family Foundation and Casey Family Programs, committed to ensuring that 30% of their portfolios are invested in diverse-owned firms. The Rockefeller Brothers Fund announced in 2020, a commitment for 25% of their endowment to be managed by women and diverse managers (Valerie Rockefeller, personal communication). These trend-setting entities are models that other capital allocators can follow. Consider including the following goals and criteria in an IPS:
Source: Kristin Hull, PhD
We are at a time of inflection, where all of our actions matter. It’s time to “own what we own,” and to align all of our actions and our assets with the world that we want to see; a world that is just and inclusive. May we each take the time to look at our investment process, and take steps to move our money toward justice. If you want help doing that, do give us a call.
Important Disclosure:
The views presented here are those of Nia Impact Advisors, LLC (“NIA”) and these views may be subject to change. This information illustrates NIA’s engagement and activism. All information is obtained from sources believed to be reliable, but NIA does not certify the accuracy or completeness of this information. This blog article does not constitute an offer to sell or the solicitation of any offer to buy any security. All investments carry risk. An investor must consult with their investment professionals prior to making any investments to ensure that they understand the associated risks.
The incorporation of environmental, social and governance (“ESG”) considerations into the investment process may cause the investment adviser to make different investments than other funds that have similar investment portfolios and/or investment styles. Under certain economic conditions this could cause the investment adviser’s performance for any of its portfolios, including the Fund, to be worse than similar funds that do not incorporate such considerations into their investment strategies or processes. In applying ESG criteria to its investment decisions, the investment adviser may forego higher yielding investments that it would invest in absent the application of ESG investing criteria.
