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Call No. 22 replay: Rooting out racism as a systemic risk (audio)



ImpactAlpha, Aug. 27 – Investors have been talking about systemic risks at least since the Great Financial Crisis of 2008. More recently, climate change, income inequality and now, suddenly, pandemics have been recognized as systemic risks as well.

The current discourse on racism uses systemic in a different way, recognizing the culture, policies and institutions that particularly disadvantage Black people.

This month’s Agents of Impact Call joined two conversations that are too often separate: systemic risk and systemic racism.


Listen to the replay of The Call No. 22: Systemic impact investing.


Is racism a systemic risk?

“Oh, hugely so,” said Demetric Duckett, managing director of Living Cities’ Capital for the New Majority. “The way we got to black Africans being enslaved in great part was because they were easily identifiable. We built an entire system around controlling that very population. It’s a system, and we should own it that way.”

Case in point: The U.S. economy is largely consumer-driven at the same time the ‘new majority’ is increasingly composed of people of color, “and yet they have the least money,” Duckett said. “If we don’t know our history, how do we actually build for our future?”

To even begin to play a role in uprooting systemic racism, investors have to modernize investing itself, said Sinclair Capital’s Jon Lukomnic, author of the forthcoming book “Investing that Matters.” Modern portfolio theory has no way of dealing with risks – and opportunities – that are a function of the market itself, not of particular holdings. At least 75% – and possibly as much as 94% – of investment returns are a function of such systemic or systematic risks, he said. 

“Value and risk are created in the real world. They’re not created the financial markets,” Lukomnic said. “Our financial markets are dependent upon having decent environmental, social and financial systems that work. Modern portfolio theory gives you no way to attack those problems.”

“If there’s a systemic racism issue in the United States, and the gatekeepers of capital – including myself and everyone who’s running capital – is overwhelmingly white, then we have to look inward first to fix that, and be sensitive to it, in order to get capital to where it’s needed in society and to improve overall returns.”

Complex systems

In a world where value is generated by talent, innovation and networks, a system rooted in division and hierarchy is increasingly archaic. Like fossil fuels, racism has a long tail. But like fossil fuels, it’s a relic of an economic system that is itself obsolete.

The Investment Integration Project’s Bill Burckart, co-author of the forthcoming book, “21st Century Investing,” said investors need to understand the feedback loops between their investments and the overarching systems that make profitable investment opportunities possible. That means going not just selecting specific investments, but influencing investment policy statements, engaging in proxy voting and other stewardship activities, disclosing and collecting data and working through networks. 

Systems are complex and dynamic,” Burckart said. “Solutions have to be equally complex.”

How investors are challenging assumptions and building portfolios to advance racial equity

For investors, unpacking the past and redesigning the future will take multiple passes. 

“We need to look and understand how the foundation of our economy has been built lopsided, and it’s not sustainable. We’re building this house on top of this unsustainable and fragile foundation and that poses systemic risks for our clients,” said Cambridge Associates’ Sarah Hoyt. “And that comes in the form of abusing our environmental systems and investing in dirty industries and the dynamics between financial markets and regulatory markets and systems that have artificially moved capital, away from communities of color and toward other communities and widening that wealth gap.”

Overcoming that history presents opportunities as well, she said. “Social equity (indicators) and data is very hard to use in an investment context right now – I think that’s where a lot of managers can find their edge.”

Such cross-cutting innovation is not the province of finance alone. A comment from The Call’s co-host, Monique Aiken – “I didn’t have history classes in my business school” – triggered a chorus of testimonials from other Agents of Impact with diverse educational backgrounds, including Hoyt (Rhetoric and French) and Duckett (French and Chemistry). 

“The financial system trains its people to be very deep and very narrow and not to look outside itself,” Lukomnic said. “And I think it’s not an accident that many of the people who are thinking about these things from within the financial system actually were trained in other disciplines.”

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