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Digging deeper to root out racism in investment portfolios



Investors need to build a broader toolbox for advancing racial justice. 

To do that, we need to experiment with strategies that demonstrate what a total racial justice approach looks like. 

Since the murder of George Floyd and the subsequent demonstrations, many investors are considering the ways in which they can mitigate racial justice. However, they are typically acting without guidance from broader racial justice movements, and acting in limited ways. 

Over the last decade, we have seen investors respond to larger society’s calls to address the lack of diversity and representation within businesses by implementing diversity and inclusion efforts such as apportioning funds to asset managers of color who are largely underrepresented in their field, to investing directly in entrepreneurs from communities of color. These strategies have laid a foundation for today’s environment where announcements from investors proclaiming practices that promote economic opportunity for people of color and racial justice are commonplace. 

More recently, these strategies have evolved to incorporate initiatives that more explicitly target impact in black and brown communities. These initiatives are valuable contributions to the fight for racial justice. And yet, they are still leaving potential for impact on the table. Investors that say the care about racial justice need to address all the ways race shows up in investments.

Capital is deeply linked with racial injustice in a myriad of ways that current investor responses do not address. Where divesting from industries such as that of private prisons is a popular approach to rectifying racial injustice, it does not account for all of the ways that racial injustice and finance are intertwined. Areas of major overlap between the criminal justice, race and capital include policing, privatized prison services and probation among many others. 

  • Products and services that are used by police, such as nonlethal weapons, support multi-billion dollar businesses owned by private equity firms. 
  • Corporate donations to “police foundations” provide additional private funding to public police departments. 
  • The perceived need for contracted policing services has contributed to a spike in private security contracts with various actors from retailers to prisons. 
  • Probation services that capitalize on services from pre-trial supervision to ankle electronic and GPS monitoring are offered by small, privately held companies as well as from publicly-traded health services providers.

As it stands, finance is often portrayed as too tangential when it comes to resolving race-related issues beyond direct investments into vehicles with presumed ties to communities of color. The current narrative positions finance as only able to do so much, diminishing its complicity in, and relegating its responsibility for, upholding systems that perpetuate racial injustice. 

We know that finance can do more. Despite capital’s effects on racial outcomes, it is often an afterthought when it comes to developing strategies for investor response, and instead, presents a band-aid solution to a problem with roots that are centuries old. If they did consider all the strategies, they would be more aligned with racial justice movements

A movement within finance and impact investing to challenge racial injustice would need to look quite different in order to affect serious change. It will take a deeper level of commitment and intentionality to look beyond the more egregious violations of racial justice – such as the problems with private prisons or the inadequate representation of people of color on company boards and in top-level management positions.

Digging deeper

The fabric of our society is held together by systems that were built on the oppression and exploitation of Black people – the problems we are seeing today across social areas are a direct result of this. Because of the prevalence of racial inequity in our society, racial injustice shows up across all asset classes and industries. 

The gig economy presents a similarly illuminating example of the pervasiveness of racial injustice. Roughly one-third of adults in the US depend on on-demand platforms for a portion of their income. Workers of color are more likely to rely on on-demand work, comprising two-thirds of the employment pool, as they are more likely to experience racial discrimination in hiring among firms offering more stable jobs. In fact, incidents of hiring discrimation against Black applicants haven’t declined since 1990. The legacies of neighborhood and community segregation and inequitable access to education only compound the opportunity gap that people of color experience in the workplace. 

The gig economy should, in theory, serve as a means of remedying the barriers to quality employment faced by people of color. However, these jobs aren’t offering most on-demand workers the wages they need to survive – half of gig workers have annual incomes of less than $30,000. This is yet another way that racialized outcomes show up in a given industry.

Taking action

Get smarter. First, investors need to learn and understand the role that their investments play in perpetuating harm, even when they can’t see the issue firsthand. Response should not be dictated by the visibility or egregiousness of an offense. Transform Finance research presents an approach to identifying the potential overlap between investments and racial injustice.

Act with urgency.  Second, investors must figure out what they can commit to in the next year, whether better understanding the goals of the racial justice movement and its asks; starting to think about what an racial justice audit could look like for them; figuring out the questions they could ask as part of their diligence process etc.

Pay it forward. Third, those who move first must take ownership of their position to share their best practices. This will allow us as a movement to figure out how to deepen the approach over time so that we can have more actionable research and recommendations, from a social justice perspective and from a finance perspective.

With Transform Finance, ImpactAlpha is curating contributions and responses to move this work forward and maintain momentum. We are looking for specific industry input and additional research in the following areas: 

  1. Outcomes. How have you seen allocations affect outcomes in relevant areas?
  2. Alignment. How should our research be framed or presented to be relevant to various types of investors, from family offices to major institutions?
  3. Critique. What would you add or how would you improve this framework?

Please send 200 to 400 word responses to editor@impactalpha.com and cc’ shante@transformfinance.org


Shante Little is research and content lead at Transform Finance.

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