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How to unlock the value of diversity and inclusion in impact investing



During an interview with Bloomberg TV, Arlan Hamilton, founder and managing partner of Backstage Capital – a fund that invests in founders who identify as people of color, women, and LGBTQ – was jokingly posed a question about investing in white men. “So, what if you find the next Mark Zuckerberg, and he doesn’t fit your race and gender criteria for your fund, do you just let him walk away?” probed the reporter. Almost immediately, Hamilton chuckled and quipped, “Absolutely…I try not to say I’m finding the next Mark Zuckerberg anymore because I want better.”

Her point is that diversity, equity, and inclusion is too often undervalued by investors. The core goals of diversity and inclusion are to achieve representation, opportunity, and belonging for systemically marginalized groups, including race, gender, sexual orientation, sexual identity, religion, age, disability, and country of origin. It’s an increasingly common emphasis among global impact investors. 

In the U.S., diversity and inclusion has taken on increased urgency alongside broader public acknowledgement of the dehumanization and systemic racism faced by Black people and other communities of color—and of the need for institutions to be more intentional in addressing structural inequities. Investors are behind the curve, but they’re catching on. A few venture capital leaders (e.g., Backstage Capital, Camelback Ventures, Illumen Capital, Founders First Capital Partners, Kapor Capital and scores of others featured in ImpactAlpha) are demonstrating how to unlock returns on inclusion with intentionality, unique theses and anti-bias strategies. Still, less than 1 percent of American venture capital-backed founders are Black and less than 2 percent are Latino.

Across our work in impact investing and philanthropy, we have seen how a few investors have begun to incorporate race into their decision-making. To be clear, these are necessary but insufficient first steps on the journey toward racial equity in impact investing.

Gather data

Venture capitalists aside, most other investors lack data on the racial composition of their portfolios. A 2019 study by the Knight Foundation recognized that the lack of systematic data on the diversity of investees is one of the most significant barriers to research on diverse ownership or management. In our own assessment of private equity and impact investing’s primary data providers (including both established venture capital and private equity platforms, and those exclusively focused on impact investing), we could find no systematic collection of data on portfolio racial composition. For an industry that evangelizes its dependence on data for decision-making, collecting demographic information associated with investees can build a solid foundation and provide a clearer picture of areas where they can improve. 

When it comes to increasing diversity among investment managers, the WK Kellogg Foundation has shown that having a grasp of demographic data is essential. Kellogg partnered with Progress Investment Management to learn from its proprietary database that identifies asset management firms owned and led by people of color. The database provided Kellogg essential input into creating a $100 million fund for emerging managers, including women and people of color. 

To track diversity within the U.S. venture capital workforce, the industry relies on the NVCA–Deloitte Human Capital Survey. The survey captures data on the current state of diversity and inclusion across the industry and is intended as a resource for VC firms to understand how to expand the diversity of their teams. 

These initial survey and data gathering approaches are simple and scalable—and provide the needed baseline to hold the field accountable to much needed progress.

Set goals

Months prior to the COVID-19 pandemic and the current wave of protests against police brutality, Goldman Sachs and TPG, both past Bridgespan clients, made news with announcements of their commitments to more diversity on boards of companies in their investment portfolios. This type of explicit target setting establishes a clear yardstick for future accountability—which is increasingly critical as skepticism mounts around the wave of corporate solidarity statements that lack commitments to action.

Benchmarking against similar organizations offers another way to set goals and track progress. The Institutional Limited Partners Association has created a roadmap to catalog best practices and resources to advance diversity and inclusion in the private equity industry. It includes guidance such as how to “Apply Diversity and Inclusion to Investment Strategy” and “Measure and Benchmark Diversity and Inclusion Progress” practices. Incorporating non-financial data into investment decision-making and management is table stakes for impact investors—yet adoption of these practices varies widely today. Impact investors have the opportunity to lead through their actions here. 

Act now

The inequities exposed by the COVID-19 pandemic and systemic racial bias in policing, highlighted by a resurgent Black Lives Matter movement, have given fresh urgency to the national conversation about  racial equity. The racial justice organization Race Forward reminds us in a recent newsletter of the importance of “explicitly naming race as a factor that informs how we assess ‘Who is most vulnerable? Who is burdened? Who benefits?’” if we want to ensure that our responses, practices, and policies to this crisis achieve equitable impact. For impact investors, data gathering and goal setting are essential tools for incorporating diversity and inclusion  in their business practices and portfolios—both in the United States and around the world. 

As Arlan Hamilton’s laughter subsided over the Mark Zuckerberg question, her expression changed from humor to a resolute seriousness.  We imagine the same intensity when she told Inc. magazine, “This is not a nonprofit or a charity. I want killer companies that are making money and will make money.” She treats race as a critical element of her due diligence, and she’s not alone. It’s time for the impact investing community to lead the investing world in breaking through the systemic barriers that impede capital from flowing to Black leaders and other leaders of color.


Michael Etzel is a partner in The Bridgespan Group’s Boston office. Willie Thompson is an associate consultant in The Bridgespan Group’s Boston office.

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