This post by Gwladys Ngatchou, of IEN, is part of a series in which IEN members and network partners share their thinking about intentional endowment investing to address racial injustice and other diversity, equity, and inclusion themes. Follow along to read members' insights on five points endowments and institutions can learn and apply from IEN’s primer to gain financial returns while investing for a just and sustainable economy.
Abnormal circumstances breed uncommon solutions and those that respond spontaneously to change tend to benefit the most, either from experience, financial returns, or both, yet the question remains who will volunteer to be the prime mover? The new normal created by the pandemic and intense reckoning of systemic racial and social injustice has drawn attention to the “S” in ESG investing hence an open window for investors to act on the social factors of socially responsible investing. Financial institutions like JPMorgan Chase, Northern Trust, and Capital One made a step by offering a paid day off to all or parts of their business on Juneteenth, an annual holiday to honor the end of slavery celebrated since the 1800s by African- Americans.
In the education sector, Yale’s Chief Investment Officer David Swensen publicly instructed its money managers to diversify their ranks — or risk losing Yale as a customer. Offering a day off and requesting an increase in diverse asset managers in response to the call to end racial injustice is a start in addressing racial inequality, yet taking superficial resolutions for a deeply enrooted social issue is setting up for an ineffective long term solution. This is why investors who want to take advantage of the current social unrest to make a difference in the way they invest need to set aggressive attainable goals and gear themselves with resources to meet them.
One resource, to start with, is the recently published Racial Equity Investing Primer by the Intentional Endowments Network (IEN) to help endowments familiarize themselves with the current state of racial inequity in America and provide action steps to commit to racial equity investing. This blog highlights five points endowments and institutions can learn and apply from IEN’s primer to gain financial returns while investing toward a just and sustainable economy.
#1 Clarity to Racial Equity Investing
Charles Kettering, an American inventor, and engineer, once said a problem well-stated is half-solved, a statement that I believe explains investors' struggle with social investing. The fact that we still need a common understanding of sustainable investing, especially the social aspect of ESG, and ways to measure its impact, implies that we might not fully understand what social investing is or how to invest toward social issues. IEN’s Racial Equity Primer attempts to address this racial equity investing discordance by defining what it is and providing three investing strategies to help close the racial wealth gap. Its recently released Primer defines racial equity investing as
“developing and committing to business practices that proactively identify and counteract racial inequities within a company or an organization, and allocating capital to intentionally and measurably address systematic racial inequities in social, environmental, and economic outcomes.”
The primer also notes that although racial equity investing can take several investment forms, the strategy used by most are; allocating investments to racially diverse consultants and asset managers; allocating to asset managers that invest in diverse founders that benefit and empower communities of color, and engage with portfolio companies to improve business across business related to social and racial equity risk. Applying these strategies can lead to diverse investment thought and potential access to new markets with workplaces, products, and services that are inclusive of people from a diverse range of backgrounds.
#2 Why Engaging in Racial Equity Investing Matters
Speaking of an eventual possibility to tap into new markets when engaging in racial equity investing, it is estimated that by 2032 the majority of the working class and labor force will be people of color which accounts for about 80% of consumer spending in GDP growth. If not for the sake of the working class, labor force, or consumer spending constituting of mostly people of color and underrepresented communities, the Racial Equity Primer purports that a history of systemic and structural racism in the U.S. has made race a key driving factor of outcomes and is an area of interest to many investors who focused on social equity.
Sustainable investors and economists have equally begun to understand the extent to which socioeconomic inequalities are informed by racial stratification in virtually every sector of society. Thus neglecting race and its relation to the economy that is increasingly driven by young people and people of color is positioning your investment at a disadvantage in future markets
# 3 Risk and Opportunities for Engaging in Racial Equity Investing
As discussed above, racial stratification has affected major sectors of the American economy. IEN’s Primer stipulates that the effects we are currently witnessing occur as a result of hundreds of years of beneficial political, financial and cultural institutional, and individual practices that excluded and/or harmed Americans of color for white families. As 20% of white families for instance can trace the origins of their wealth back to the Homestead Act of 1863. In terms of sustainability, economists have long considered social equality to be a prerequisite for sustainability, as is reflected by the UN Sustainable Development Goals and statements by the World Economic Forum (WEF). Inequality has therefore been identified as a leading domestic and global economic risk in areas of health, income, and healthcare. Even though inequality has brought immense damage to the economy, it also presents in itself a vast field of opportunities. Closing the racial disparity will boost the GDP and tax revenue, adding between $1 and 1.5 trillion, or 4 to 6% of projected 2028 GDP to the U.S. economy. And the W.K. Kellogg Foundation found that by 2050, closing racial disparities for Black and Latinx Americans in the following would generate $2.3 Trillion economic gain in education, $550 Billion in additional annual in employment and federal, state, and local tax revenues, and $800 Billion in additional consumer spending.
# 4 Evidence on the Applicability of Racial Equity Investing
The necessity and opportunities presented by racial equity investing have attracted endowments and institutions’ curiosity toward the investment strategy. Higher education endowments are increasingly examining how their investments align with their institutional mission, values, and sustainability goals. The Intentional Endowment Racial Equity Primer presents six examples of institutional investors that have committed to diversity, equity, and inclusion in their investment processes. Among those intentional investors is the Warren Wilson College for which a case study was made to explore its active ownership in its integration of effective sustainability in every sector of its campus life and college operations.
# 5 Steps on How to Effectively Apply Racial Equity Investing
Now that we’ve defined and illustrated why it is important to engage in racial equity investing and layout the opportunities that come with racial equity investing. I believe it will be appropriate to at least share with you how to apply it. When it comes to applying racial equity investing Keith Johnson and Tiffany Reeves, of Reinhart's blog post beautifully summarizes how and why fiduciaries can implement IEN’s Primer guidance in the context with their institutions’ racial equity goals which you can see below. The picture from IEN Primer below provides action steps any endowment or investment institution can take to align their mission with Racial Equity goals.
- Commit to discussing racial equity at investment committee meetings: Have the necessary conversation to assess how your investments provide solutions to or perpetuate racial inequality.
- Conduct bias training as perceptions of race can inform both business and investment operations through hiring and retention, manager selection, and risk assessment.
- Diversify the Board and the Investment Committee to bring in new insights, spur new approaches, and expand networks.
- Update your Investment Policy Statement to reflect your diversity and inclusion priorities.
- Engage with consultants and ask your asset managers about their approach to internal diversity and inclusion.
- Allocate to racially diverse consultants and asset management firms to diversify talent and deal flow and improve the investment portfolio’s risk and return profile.
- Allocate to funds with a racial equity investment thesis or businesses that produce products and services that address key issues for communities of color, such as Community Development Financial Institutions (“CDFIs”).
- Engage with companies as a shareholder on issues that relate directly to diversity, equity, and inclusion, such as those requesting that companies connect executive pay to diversity and inclusion-related outcomes or addressing the board and executive leadership diversity; require transparency from external managers as to how they engage with companies on these issues.
- Use investor voice in partnership with organizations focused on racial justice to advance anti-racist public policy through investor statements, pledges, and public comments to spur collective action.
- Offer internships in the Investment Office for underrepresented students to aid in developing diverse talent in the finance industry, or create a student-managed fund focused on diversity of the team as a racial equity investment strategy.
- Disclose information on your diversity and inclusion strategy and progress to encourage transparency and accountability.