ImpactAlpha, March 21 — Moral imperative? The threat of economic instability? Or the unrealized economic potential of our nation’s diversity?
Whatever their motivations, a new framework for Investors in racial and economic equity lays out a roadmap for action and rubric for assessing progress in redressing the legacies of racial inequality.
“While capital and investment are powerful drivers of innovation and prosperity in our society, they have also played a role in fostering racial and economic inequality,” PolicyLink’s Michael McAfee said last week on a virtual panel organized by the New York Federal Reserve where the framework was released.
“With the scale of these challenges, we need all investors to lead the way in a way they have never led before.”
The framework, “Investor Blueprint for Racial and Economic Equity,” was developed by PolicyLink, a nonprofit research and action institute, in partnership with impact advisory firm CapEQ and global nonprofit consultant FSG. The framework builds on the work of the Corporate Racial Equity Alliance co-founded by the three organizations along with JUST Capital, B Lab and the Global Impact Investing Network.
The framework provides additional structure and rigor for Metrics Madness, ImpactAlpha’s effort, in partnership with Southern Reconstruction Fund, to identify key metrics for assessing racial wealth-building investment strategies (see, “Tracking investment theses against the promise of Reconstruction” and join the finale to Metrics Madness on ImpactAlpha’s Call No. 50 on Wednesday, March 29).
Anchoring on outcomes
The 10 outcomes detailed in the framework are key to translating good intentions into effective investments, the report says. They include equitable governance and leadership, accountability through transparency and “reckoning and repair,” through which institutions assess and acknowledge accountability for racial injustice.
Other outcomes include balance in power and leadership positions, wealth generation and social and economic mobility and a thriving multiracial democracy. The report stresses that tailoring smart strategies and investments to historically underinvested and excluded groups “has the distinct power to cascade benefits upward and outward for the well-being of society.” PolicyLink is known for championing the “curb-cut effect” that focuses on racial and economic equity as the pathway to opportunities and benefits across society.
Rounding out the 10 outcomes are health and well-being; thriving and diverse communities; climate, environmental and spatial justice; and inclusive representation and narrative change.
“Think of the 10 equity outcomes as the successful mitigation of the negative externalities of all institutions in our society,” the report suggests.
The three levers cover more than a dozen specific actions to flip systemic risks to value creation. Such equitable practices, the report suggests, can expand the deal pipeline, onboard the best talent, expand market reach, promote economic stability and improve returns.
On the panel, MassMutual’s Liz Roberts explained how the financial institution launched its Catalyst Fund as a “hypothesis-testing fund in response to the death of George Floyd in late 2020.”
“As a financial institution, we were like, ‘How do we create a theory of change that addresses inequality and capital access?” Roberts said. The firm saw an opportunity to “put more capital in the hands of the economic majority, designing products for the new economic majority.”
MassMutual launched the Catalyst Fund with $50 million to back Black-led and underserved impact businesses in its home state of Massachusetts. For example, the Catalyst fund has backed Black woman-owned CareAcademy, which is upskilling home health caregivers.
MassMutual created a separate $50 million initiative to invest in first-time Black, Latinx and Indigenous fund managers, backing seven funds including Latino-owned venture firm L’Attitude Ventures and Black woman-led Impact America Fund. The insurance company announced an additional $100 million for first-time diverse fund managers in October last year.
“We started with a very small fund from a moment of tragedy, but then we were able to build an investment platform and really grow that by doing the work, having the metrics along the way and proving the market size,” says Roberts.
The practices involve strengthening firm governance and culture, reevaluating perspectives on risk, and building equitable portfolios.
“The opportunity and urgency to tackle inequality and advance equity has never been more urgent, and no sector in our society can afford to sit on the sidelines,” McAfee said.
The investor blueprint also lays out five bold goals. They include deploying at least 40% of all investment capital to businesses owned by people or color and historically underinvested communities; making women and people of color at least 40% of capital decision makers within firms; and designing new and inclusive investment structures that open up growth opportunities for diverse fund managers and small businesses.
Less than 20% of management roles within investment firms are held by people of color. And of the $80 trillion in assets under management in the U.S., less than 2% are managed by diverse-owned firms.
These numbers have resulted in more capital going to white businesses and communities, further exacerbating racial wealth and income gaps and socioeconomic disparities in underserved communities and communities of color.
By allocating capital to managers of color and emerging managers, particularly those that are focused on investing in historically marginalized communities in the U.S., investors could unlock long-term value creation and positive impact.
The framework also recommends working closely with historically underinvested communities and business leaders of color in the design, deployment and impact measurement of new inclusive strategies. People of color will be the new majority in the U.S. by mid-century.
Bridging inequality gaps is the work of this generation, McAfee says. “This work is going to be waiting for investors whether they do it today or 100 years from now.”