Inclusive Economy | July 10, 2024

Mitigating the systemic risk of anti-LGBTQ+ sentiment in investing

William Burckart

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Guest Author

William Burckart

The lack of representation of LGBTQ+ individuals in the investment space is a systemic risk. By successfully navigating that risk, investors can strengthen systems and improve portfolio performance.

The White House last month hosted for the first time a group of venture capital investors, industry associations, and entrepreneurs for a dedicated discussion on the state of capital allocation to LGBTQ+ led and focused funds and startups. 

Among the policies discussed: Funding for data collection on LGBTQ+ representation in entrepreneurship, investing, and financial sectors,  increasing the number of accredited investors from LGBTQ+ and other underrepresented communities.

Organized by Patrick Driscoll, a leading investor and advocate for LGBTQ+ equity, the goal was to educate public sector leaders on the barriers that LGBTQ+ fund managers and startup founders face and provide actionable recommendations to improve the flow of capital (see, “Embrace the rainbow: The investment case for LGBT fund managers and startups”).

I attended in my role through Colorful Capital, and other attendees included representatives from the National Economic Council, the Department of the Treasury, and investors from international banks as well as VC firms. 

We gathered together to confront the stark disparities in our economy: Even though about one in twelve people in the U.S. identify as LGBTQ+, only 0.6% of Fortune 500 corporate board members identify as LGBTQ+. Similarly, among over 13,000 U.S.-listed companies, only nine (or 0.06%) have an out CEO. What’s more, LGBTQ+ led ventures received only 0.5% of the $2.1 trillion in startup funding allocated in 2023

The exclusion of an entire demographic of people from business leadership and financial services ignores the material benefits of LGBTQ+ inclusion in the fabric of our commercial, social, and civic society. This problem will only grow, as each generation is twice as likely as the generation preceding it to identify as LGBTQ+, according to Gallup.

Systemic risks

Despite this growth, and the increasing cultural exposure to the LGBTQ+ community, discrimination and demonization remains rampant. In 2023, a record 510 anti-LGBTQ+ bills were introduced at the state level. 

These discriminatory bills have led to a stratified society: Over half of LGBTQ+ people in the U.S. live in an area where they can be legally denied credit, mortgage, and lending services for themselves and their businesses because of their identity. In 19 U.S. states, LGBTQ+ people can be unfairly denied housing, and almost a third of LGBTQ+ people in the U.S. live in states where they can be refused service or denied entry to public places or private businesses. 

All of these policies and practices have tremendous effects on our economy and financial system. We see income disparities, workplace discrimination, lack of corporate leadership, criminal justice and persecution, disparities in healthcare, education, and treatment of LGBTQ+ youth, and lack of housing and retirement support. These issues drain resources, while also preventing LGBTQ+ individuals from fully participating in the economy.

The exclusion of LGBTQ+ individuals from our economy, and specifically, the investing space, is what is known as a “systemic risk.” Most investors believe markets are objective and efficient in pursuit of returns. Yet the market fails to account for the true level of systemic risk arising from continued inequitable treatment of and barriers for the LGBTQ+ community. 

When investors internalize the gains and benefits of their investments but externalize or shift the costs of those investments on to the environment and society, they invite and even foster social dysregulation and dysfunction.

System-level solutions

As we go through a generational shift with more and more individuals identifying with the LGBTQ+ community, more needs to be done to create an inclusive economy for all. Many investors think of LGBTQ+ issues as political or social, but they are in fact economic, and investors play a role in contributing to the exclusion by willfully disregarding their role in the problem. 

Based on the extensive work of The Investment Integration Project (where I am CEO), we know investors can successfully navigate systemic risks to strengthen systems and improve portfolio performance. The challenge of LGBTQ+ exclusion is no different. 

In our book, 21st Century Investing: Redirecting Financial Strategies to Drive Systems Change, my co-author, Steve Lydenberg, and I outlined the strategies that system-level investors can take to improve systems alongside returns. One major technique, which few traditional investors use, is “polity”, or engagement in public policy debates. 

Polity was the exact advanced technique that the system-level investors leveraged at our White House meeting last month. We engaged in a deep discussion about what kind of policies were needed to better support LGBTQ+ investors and business leaders. 

The policies discussed included things like more funding for LGBTQ+ initiatives, specifically focused on data collection in entrepreneurship, investing, and financial sectors; as well as initiatives to increase the number of accredited investors from LGBTQ+ and other underrepresented communities.

SEC in focus

One clear call to action that came from the meeting was the need to create a subcommittee within the SEC to specifically focus on the needs of LGBTQ+ investors (inclusive of venture capital as well as the full range of asset classes). This subcommittee would bring together investors who care about LGBTQ+ issues as a systemic risk to discuss additional advanced techniques that can be used to better mitigate the issue of LGBTQ+ exclusion. 

A subcommittee would be able to design a plan of action for creating data infrastructure around LGBTQ+ investing, or for setting standards for increasing representation of LGBTQ+ investors within the industry. All of these actions have grounding in the “field building” approach of system-level investors.

Luckily, we have a model for how to create such a subcommittee within the SEC. Recognizing the lack of gender and racial diversity within the asset management industry, the SEC’s Asset Management Advisory Committee created a subcommittee to focus on the issue. They released a report in 2021 to offer recommendations on solving the problem. Recommendations included increased transparency around diversity within a firm as well as clarifying fiduciary duty requirements to be more inclusive of diverse managers. 

Creating a similar subcommittee within the SEC to focus on LGBTQ+ issues, or expanding the scope of the existing subcommittee to explicitly encompass LGBTQ+ individuals, could help mitigate the risk of LGBTQ+ exclusion within the market (and futureproof progress, regardless of evolving political winds). The recent legal threats to DEI and ESG integration, exemplified by the case against the Fearless Fund, makes this kind of subcommittee even more critical. 

If you are an investor who cares about LGBTQ+ issues or wants to learn more, consider exploring Colorful Capital’s recent report, Outsized Impact, which I co-authored with Lloyd He, and getting involved with groups like StartOut and Out in Finance. The report highlights those organizations, discusses the need for policy action, and explores additional measures to mitigate the ongoing risks created by LGBTQ+ exclusion in our economy.

William Burckart is co-founder of Colorful Capital, CEO of TIIP, and a professor at Columbia University.