Racial Equity Investing Helps Bridge Wealth Gap
Institutional investors who are troubled by the economic disparities among racial and ethnic groups in the U.S. don’t have to settle for the status quo. They can take action by investing their portfolios in ways that help undo those structural inequities.
This call to action was one of the solutions institutional investors offered at the RFK Compass Investor Virtual Summit in October. Over 300 attendees representing close to $7 trillion of assets under management gathered for the RFK Compass Investor program’s first-ever virtual forum to discuss the ways investors can advance human rights through their portfolios.
The protests sparked by the recent killings of George Floyd and Breonna Taylor provided a sober reminder of the urgent need to take action, but there has long been ample evidence of the inequities created by centuries of systemic racism in our society. Essma Bengabsia, senior associate at Glenmede Trust in Philadelphia, kicked off a summit discussion on the issue by summarizing just a few of the disparities that plague the U.S. economy:
- The median net worth of white households is $171,000, nearly 10 times that of Black households ($17,600) and eight times that of Latino households ($20,700).
- Seventy-two percent of white families own their homes, compared with 47 percent of Latino families and 42 percent of Black families.
- Excluding recessions, the Black unemployment rate has been at least double the white unemployment rate since 1972.
“So what is our role as investors in all of this?” Bengabsia asked. At Glenmede, she wrote a guide to racial equity investing—a new investment strategy that seeks to close racial disparities in wealth and access to opportunities, resources, and decision-making while generating market-rate returns for investors.
The strategy’s basic premise is that portfolios can benefit when investors promote racial equity through their allocation decisions by backing racially diverse investment managers, racially diverse companies, or businesses whose activities and investment strategies promote racial equity in our society.
The discussion featured several investors who’ve had success pursuing such strategies. Evelysse Vargas explained how New York City’s Board of Education Retirement System, where she is a senior investment analyst, doubled its allocation to racially diverse investment managers over the last year, from 2 percent to 4 percent. She said the move was made possible by support from the system’s governing board and senior executives, who backed the shift in part because the $7 billion retirement system serves a diverse set of beneficiaries. Reflecting that diversity in the system’s investment manager pool became a shared goal that Vargas helped implement.
“We all bought into this,” said Vargas. “I think if you want to do it, you will.”
Patricia Farrar-Rivas, who oversees about $1.5 billion of assets under management at Veris Wealth Partners, talked about several successes her impact investment advisory firm has had in racial equity investing. One is the Impact America Fund, a venture capital investment firm that invests in companies built by and for people in marginalized communities. Farrar-Rivas said the fund’s investments help low-income communities and business owners who are people of color and women, just like Impact America’s founder, Kesha Cash.
“The opportunities are there,” said Farrar-Rivas, chief executive of Veris. “People have just not been looking for them in the right way.”
Farrar-Rivas, Vargas, and Bengabsia agreed that racial equity investing doesn’t mean sacrificing investment performance in return for helping close racial disparities in wealth and employment. On the contrary, investing with an eye toward racial equity can boost performance. For example, the beauty and skin care industry has long neglected consumers of color who have darker complexions. Pop star Rihanna identified that gap and created a makeup line that realized over $100 million in sales within the first 40 days of its launch.
Bengabsia cited Rihanna’s success as a reminder that investments’ racial dimensions must not be ignored. “Racial inclusion is a component that cannot be neglected, and the idea being neglected in itself poses a risk factor in the investment process,” she said.