Features | September 22, 2020

Changing the investment algorithm to advance racial justice

Dennis Price and David Bank
ImpactAlpha Editor

Dennis Price

ImpactAlpha Editor

David Bank

ImpactAlpha, Sept. 22 – It’s time to recode market systems that generate racial injustice.

Last month’s Agents of Impact Call joined two conversations that are too often separate: systemic risk and systemic racism. Today’s Call continues the effort to call out the ways racism shows up across the economic landscape and highlight strategies and designs that “center Blackness and the Black experience as a necessary strategy to ensure economic liberation for all Americans,” as the Insight Center’s Anne Price, Jhumpa Bhattacharya and Dorian Warren put it this summer.

Identifying the ways finance drives racial injustice is essential for investors looking to do the opposite: Use their portfolio to root out racism.

  • Municipal finance. Cities that treat their residents fairly have longer, stronger fiscal outcomes, says Activest’s Ryan Bowers. Cities that do the opposite risk stranding assets of such injustice, including jail infrastructure and extractive revenues, leaving taxpayers and investors with liabilities and expenses. “Too many local governments have predicated their financial fortunes on the control and oppression of Black people,” writes Bowers, along with Activest’s Napoleon Wallace and Chelsea McDaniel. Until recently, Bowers struggled to get meetings with city budget directors to make that case. Now, Bloomberg Philanthropies has tapped Activest to help officials in 30 urban centers put equity at the center of their COVID recoveries. Activest has teamed with investment firm Adasina to offer a fixed-income portfolio that invests directly in Black communities, primarily through municipal bonds.
  • Digging deeper. Investments in real estate need to consider displacement and gentrification in communities of color. Investments in waste plants that degrade air quality must take into account proximity to Black neighborhoods. “All investments lead to some kind of socioeconomic outcome,” declares Transform Finance in “How investments drive injustice and what investors can do about it,” a new report. “Some outcomes are more racialized than others.” More examples: Predatory practices at payday lenders and other financial services providers that lead to indebtedness and poor credit scores among Black customers, and just-in-time scheduling algorithms used by retail and other employers that cause high-levels of stress and limited quality parenting time in Black households. The report argues that an investment strategy to address racial injustice holistically would align investment capital with socioeconomic outcomes for people of color.
  • Asset allocation. Unexamined bias, and even explicit racism, in asset allocation is causing some of the world’s biggest money managers to leave returns on the table. The biases of asset allocators, says Illumen Capital’s Daryn Dodson, “inhibit them from seeing the value of the investments because of the person presenting the opportunity to them.” Illumen’s study of how investors evaluate funds and allocate capital, with Stanford SPARQ, found that racial bias actually increased with better performance by managers of color (see, “The better fund managers of color perform, the more bias they face). Illumen works with fund managers to reduce racial bias in investment processes, hiring and promotions and governance of portfolio companies. The tiny percentage of total investment assets managed by firms owned by women or people of color is a systemic risk, says Beeck Center’s Erika Davies, founder of The Racial Equity Asset Lab. VC Include, BLCK VC and Raben Group’s Diverse Asset Managers Initiative also are working to boost allocations to Black and Brown fund managers. 
  • Corporate impact. Mastercard “will tackle racism with the full force of our assets, be it our expertise, capital, digital products or extensive network of partners,” says Mastercard’s Marla Blow. The credit card issuer committed $500 million over five years to reduce racial wealth and opportunity gaps. Mastercard will focus on New York, Los Angeles, Atlanta, New Orleans, St. Louis, Dayton, Ohio, and Birmingham, Alabama. One avenue for change, Blow says: Mastercard’s banking partners across the country.