What Is Racial Justice Investing?
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 manufacturers or private prison operators.
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.
- Racial justice investing is a form of socially responsible or impact investing aimed at adding investments that promote racial justice, inclusion, and diversity.
- Racial justice investing can take on many forms, including seeking investment in Black-owned businesses or startups with founders who are people of color.
- 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).
Understanding Racial Justice Investing
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 cause and other anti-racist ones. 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 to their own internal practices and employee demographics, signing racial justice pledges, and issuing statements to publicize their positions. 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 the 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 March 2022, 187 institutional investors, ranging from hedge funds to pensions, had signed on to the Belonging Pledge, representing $1.88 trillion in assets under management (AUM).
A second pledge was issued by Racial Justice Investing (RJI). Its Investor Statement of Solidarity to Address Systemic Racism and Call to Action states, “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 188 institutional investors as of March 2022.
Several other pledges that have similar mission statements are also available and gaining signatures from investors large and small.
Investor Direct Action
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 mouths are. This starts by investing in firms owned and operated by people of color, as well as investing with subadvisors and portfolio managers that have diverse teams. Doing so not only promotes racial justice but doesn't undermine—and can enhance—returns. A recent research paper authored by Harvard Business School’s Josh Lerner found no statistically significant difference between the performance of portfolios managed by more diverse firms and that of non-diverse peers. And 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. The Carlyle Group has found 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 real estate investment trusts (REITs), which promote affordable housing or invest in underserved residential communities, making improvements, 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.
Investing in Racial Justice Investments
Though 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 National Association for the Advancement of Colored People (NAACP).
The top 10 holdings of NACP, as of March 2022, are:
- Meta Platforms
- Alphabet (Google) A
- Alphabet (Google) C
What Is Racial Justice Investing?
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 manufacturers or private prison operators.
What Is an ETF?
An ETF, an exchange-traded fund, is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.
What Is Cleantech?
In finance, the term cleantech—short for clean technology—is used to refer to various companies and technologies that aim to improve environmental sustainability. Usage of the term has varied over the years, with some users treating it synonymously with terms such as “green technology” to refer to renewable energy sources, new methods of recycling, and other environmentally-friendly practices.
In other cases, the term refers to methods of reducing the negative environmental impact of otherwise conventional technologies such as coal power or natural gas. In this context, terms such as “clean coal” or “clean energy” are commonly used, although many environmentalists question the validity of this usage.
What Are Assets Under Management (AUM)?
Assets under management (AUM) are the total market value of the investments that a person or entity manages on behalf of clients. Assets under management definitions and formulas vary by company.
In the calculation of AUM, some financial institutions include bank deposits, mutual funds, and cash in their calculations. Others limit it to funds under discretionary management, where the investor assigns authority to the company to trade on their behalf.
What Is an Institutional Investor?
An institutional investor is a company or organization that invests money on behalf of other people. Mutual funds, pensions, and insurance companies are examples. Institutional investors often buy and sell substantial blocks of stocks, bonds, or other securities and, for that reason, are considered to be the whales on Wall Street.
The group is also viewed as more sophisticated than the average retail investor and, in some instances, they are subject to less restrictive regulations.