This post by Keith Beverly, of GRID 202 Partners, 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 how to invest in public stocks through Racial Equity Lens.
Keith Beverly, Managing Partner & Chief Investment Officer, GRID 202 Partners
As an RIA (Registered Investment Adviser) and investment manager, we’ve had our fair share of client conversations on how we apply a racial equity lens to investing. Public equities account for the lion’s share of many of our clients’ investment assets.
After several of these conversations during which clients have sought to understand how exactly we achieve this, we realized we had to do more, both for our clients and the industry. Below we lay out the challenges as well as discuss the work we are doing to address them. Investors attempting to construct a common stock portfolio anchored in racial equity are faced with a set of imperfect solutions.
The primary shortcomings to most available approaches are one or some combination of the following:
- Inadequate racial demographic data on employees, board directors, and executive officers
- Difficulty in using a racial equity overlay to express thematic views consistently
- Questionable screening methodology that overlooks problematic companies
- Exclusive reliance on an exclusionary approach, that omits companies that engage or support practices detrimental to communities of color — without applying a rigorous selection paradigm to portfolio positions
- Absence of racial equity as an investable theme for most investment managers
- Inability to apply racial equity as a factor to be tested empirically
Shortcomings of Racial Equity Investing
Inadequate racial demographic data
The lack of racial diversity on boards has gained more attention in recent years, with several sources providing insights on trends in board makeup and executive officers. Comparable data is not available at the employee level as companies provide the information voluntarily. To date, only 4% of the Russell 3000 have chosen to do so. As clients become more savvy and discerning with their portfolios, this will become a significant handicap to racial equity-centered investing. Many investing strategies designed to employ a racial equity strategy lack sufficient data because so few publicly-traded companies provide racial demographic data.
Inability to express thematic views with a racial equity overlay
Investment managers who apply any form of active management such as individual security selection, tactical shifts, factor tilts, etc., are unable to incorporate racial equity consistently as a factor in their decision-making process. Sustainalytics (now part of Morningstar) is arguably the leading source on social risk data for publicly traded companies. However, neither racial equity nor diversity, equity, and inclusion factors are explicitly included as one of the company’s twenty material ESG (environmental, social and corporate governance) issues. Though racial diversity may be incorporated as one (or more) of their 220+ indicators that comprise the various scores, their existing tools do not enable investors to extract racial equity insights specifically.
Questionable screening methodology
In our view, an investment product that seeks to advance an agenda of racial justice should not include companies that have been serial offenders with regard to racial discrimination and abusive practices regarding Black, indigenous, and people of color (BIPOC) households. In fact, the inclusion of a single perpetrator calls into question the underlying methodology undergirding the fund’s construction. An advisor risks her credibility when proposing such a product to discerning Clients who are familiar with and committed to the cause of racial equity.
The first iteration of ESG investing advanced the mantra of “do no harm” by avoiding companies and sectors engaged in damaging practices. The divestment efforts that pressured the apartheid regime in South Africa and those pressuring fossil fuel companies in an effort to combat systemic racism and advance climate change progress, respectively, are examples of the strength of divestment or avoidance screens. Avoidance is a necessary first step when targeting a positive social outcome.
We observe a similar phenomenon today as it pertains to racial equity investing in public stock markets. The database maintained by the American Friends Service Committee which tracks over 150 companies “involved in mass incarceration, immigrant detention, and surveillance, military occupation, or the border industry” — all activities of interest to investors committed to racial equity — is an immensely helpful resource for racial equity-focused investors. Though an important first step, the tool falls short in aiding an investor to construct a portfolio composed of companies that are proven leaders when it comes to belonging and racial equity.
Racial equity as an investable theme
The proliferation of exchange traded funds (ETFs) over the past decade has introduced a variety of customized options for investors to express an investment thesis. The ETF universe has expanded rapidly from one that simply reflected size and value/growth preferences, to one featuring sector, hedged strategies, clean energy, momentum, dividend growth, IoT, and infrastructure funds, to a host of others. And yet, if investors want to invest in companies at the forefront of best practices in the treatment of employees of color or commitment to an inclusive and equitable culture, they are left with no viable options. Our methodology bridges this gap by using the opinions of thousands of women of color as the primary input to assess a company along a racial equity continuum.
Racial equity as a factor
The oft-quoted McKinsey study that concluded companies in the top quartile of racial/ethnic diversity were 35% more likely than laggards to have above average financial returns, cannot be tested empirically in public market equities using existing available data. Yet investors can test whether small cap stocks outperform large cap stocks or if companies that pay a dividend outperform those with no dividend. These relationships can be — and have for decades, been — tested empirically.While the McKinsey study examined the correlation between ethnic/racial diversity and operating income (EBIT), it does not provide insight into the real-world, financial market implications. One can deduce that more diverse companies will have better returns on their securities than less diverse companies. In fact, our initial data is consistent with the McKinsey findings — companies ranked higher by their women of color employees demonstrate stronger market returns than those that lag in their estimation.
Moving the Needle
We fully expect more companies to report racial demographic data for their employee base over time. We also anticipate more products to come to market that attempt to include racial diversity data. For example, Institutional Shareholder Services recently developed an index that incorporates ethnic and gender diversity at the Board and named executive officer level. However, even once representation figures are more widely available, numbers alone will not offer insight into the experiences and obstacles women of color face in the workplace. As recent reports of senior black women leaving companies in a coordinated fashion illustrate, providing a supportive work environment is a prerequisite to retaining diverse talent. In an effort to provide a more comprehensive solution, GRID has entered into an exclusive partnership with InHerSight, a data provider with employee survey data from over 150,000 companies and over 58,000employees of S&P 500 constituent companies, to capture these revelations.
Studies have shown Upward Mobility, A Supportive Culture, The Wage Gap, and Lack of Mentorship as persistent impediments to the success and career progression for women of color. Several components of the InHerSight score serve as effective proxies for the factors, including work culture, pay equity, institutional support and advancement opportunities, that underlie these impediments. We describe them below.
Overall Satisfaction: Measured by the InHerSight Score — a comprehensive score that incorporates qualitative data on several key persistent areas of deficiency for women in general and for BIPOC women in particular.
- Upward Mobility: Equal Opportunities for Women and Men, Female Representation in Leadership, Management Opportunities for Women
- Supportive Culture: People You Work With, Employer Responsiveness, Social Activities and Environment, Sense of Belonging
- Wage Gap: Salary Satisfaction
- Lack of Mentorship: Sponsorship or Mentorship Program
Equal Opportunities for Women and Men
How satisfied are you with women's access to the same opportunities as men have within your organization? Consider promotions, leadership roles, development opportunities, etc.
Female Representation in Leadership
How satisfied are you with the representation of women in leadership roles at your company? Consider the number and levels, whether their voices are respected and impactful, and if women feel similar leadership paths are available to them.
Management Opportunities for Women
How satisfied are you with the opportunities for women to become managers of teams and talent at your organization?
People You Work With
How satisfied are you with the amount of respect, professionalism, and unbiased behavior exhibited by your coworkers?
How satisfied are you with your company’s ability and willingness to respond to issues you escalate to their attention? Consider safety, harassment, and discrimination issues.
Social Activities and Environment
How satisfied are you with your company’s after-hours events, team bonding activities, and office perks? Consider the frequency, variety, and inclusiveness of the activities and
Support for Diversity
How satisfied are you with the way your company supports the advancement and equitable treatment of all employees, regardless of race, gender, age, ability, weight, parenthood?
Sense of Belonging
How satisfied are you with your ability to bring your whole self to work each day? Consider the warmth of welcome and inclusion you experience and your company’s acknowledgment and acceptance of who you are.
How satisfied are you with your overall compensation? Consider the amount of work you do, your cost of living, your industry standard, and what you know about your colleagues’ pay.
Lack of Mentorship
Sponsorship or Mentorship Program
How satisfied are you with the effectiveness of your company’s mentorship opportunities, sponsorship initiatives, or employee resource groups?
GRID’s Investment Philosophy and Theory of Change
To our knowledge, we are the only Black-owned independent Registered Investment Adviser (RIA) with multiple Certified Financial Planners and Chartered Financial Analysts in the country.
Additionally, over 40% of our clients identify as BIPOC. Many of our clients — both BIPOC and White — have sought us out specifically for our combination of investment expertise and deep commitment to racial equity and serving BIPOC communities.
The lack of investment options that met our rigorous standards as investment professionals, as well as our client’s high bar as authorities on issues of diversity, equity, and inclusion, made it clear we had to revamp our investment process in public equities.
As a result, our racial equity investment approach now consists of 3 pillars:
- We believe racial diversity drives alpha.
- We center the voices of BIPOC women — the group most systematically mistreated and maligned by large institutions.
- We provide households of color with access to outperforming diverse managers.
The 3 Pillars
Racial diversity as an alpha generator
The United States is projected to become “majority minority” by 2045 and, already, 44% of millennials are non-white. Companies that are favorably positioned to attract and cultivate diverse talent will have an edge in their respective markets. They will be more adept at identifying enduring trends. They will also be more likely to avoid headline risk and the concomitant volatility to their company’s stock price. Firms that lead the way on racial equity will outperform and capture market share from those who do not keep pace. Additionally, they may face less political risk as these demographic changes will also be increasingly reflected in the composition of elected officials.
Centering the voices of women of color
Several studies have shown that women of color, particularly Black women, face a more arduous path to corporate success than any other group. We believe that by uncovering and illuminating the challenges they face, through our work with InHerSight, we can extract valuable signals in the investment decision-making process. We can then systematically direct investment to companies that tangibly support and elevate Black women — as a critical lever in improving racial equity for all.
Providing access for households of color to credentialed fiduciaries and outperforming investment managers
Providing access for BIPOC households to credentialed fiduciaries and outperforming investment managers acts as a critical first step in closing the wealth gap by materially improving their financial outcomes. That in turn will enable them to fully access educational, entrepreneurial, housing, healthcare and other opportunities on an equal footing. The ability to access this wider range of opportunities and the resultant benefits they enable, and to transfer the resulting gains in wealth will pay long-term dividends, facilitating gains for future generations.
About GRID 202 Partners
GRID 202 Partners is a African-American and woman-owned Registered Investment Adviser (RIA) specializing in comprehensive financial and investment planning. We serve mission-driven organizations and households committed to aligning their financial assets with their social impact objectives. The firm’s dedication to racial equity investing and eliminating the racial wealth gap is driven largely by the expectations of its private clients -- over 40% of whom identify as BIPOC.
InHerSight is where women go for a better workplace. We give women an authentic, inside look at the female-friendliness of companies before they take the job, and we give companies access to our audience and analytics to help them win with women. At InHerSight.com, millions of women have shared their insight into the female-friendliness of 150,000+ companies in the US, and we’re working with thousands of employers to build cultures that help them recruit, advance, and retain women. For more information, visit www.inhersight.com.