Socially responsible investing has been putting billions of dollars to work for social change for decades.
In some cases, the strategy means avoiding certain sectors. Religious organizations, for instance, steer clear of alcohol, firearms, tobacco and other “sin” stocks.
Some investors focus on companies that are already socially responsible to help them thrive, while starving competitors that are less responsible.
And others aim to change the practices at the companies themselves. By buying enough shares to get a seat at the table, they have a voice in issues like climate change, worker’s rights and gender discrimination.
For several years now, investors and advisers have applied the socially responsible lens to creating portfolios that consider racial inclusion and diversity. The social unrest incited by the killing of a Black man, George Floyd, by a Minneapolis police officer has added urgency to the movement.
“We had our own list of publicly traded companies that we’ve been excluding from our portfolios for years,” said Rachel J. Robasciotti, chief executive and founder of Robasciotti & Philipson, an investment adviser. “We never thought there was a reason to share that. But now we are saying, here are the companies we don’t invest in and why.”
How investments are made to promote this goal varies. But the different strategies are working toward a similar objective: to get companies and municipalities to operate more equitably.
Investing to force change
Allocating capital is an expression of belief, starting with the belief that the investment is going to grow over time. But it can also be a means to force, support or accelerate change within an organization.
The trouble is, perfect is the enemy of good.
Companies are on a continuum: They are good at some things but not everything, said Erika Karp, founder and chief executive of Cornerstone Capital.
That means investors should know what they want and what they will accept. “Do you want to divest or do you want to engage with companies and push for change?” Karp said. “Both are OK. You just need to be consistent.”
Look for companies that are making changes and becoming more inclusive, she said. That momentum is a more important indicator than a score that may be stagnant. It’s also a barometer of a company’s intellectual honesty.
“Don’t tell me you’re all in for racial justice and then you don’t even make an attempt to drive executives of color into leadership roles,” she said.
Many of the basic tenants of the environmental, social and governance investment analysis apply to racial inclusion, said John Streur, president and chief executive of Calvert Research and Management.
“You certainly pick up quickly on board diversity,” he said. More telling is whether companies publicly disclose their diversity filings to the Equal Employment Opportunity Commission. They are required to make the report to the commission but do not have to publicly say what the results are.
“Only a few give you the data, and they’re not all great at all,” he said. Calvert is pushing companies it invests in to make those disclosures.
And individual investors should vote for the initiatives on their annual proxies, Streur said. Last year, of the 30 proxy initiatives related to diversity and inclusion that Calvert supported, only four passed, he said.
Screening out bad apples
Some managers take exception with an approach known as “best in class” because investors are still providing capital to industries that are against their interests. The best-run oil company, for example, is still pulling fossil fuels out of the ground.
“It’s really taking a stance that this business should not exist,” said Robasciotti, of Robasciotti & Philipson, which is majority owned by women and Blacks. “The ‘best in class’ allows unsustainable businesses to continue.”
With a focus on social justice, her firm created a list of companies it would not invest in because of work they do in six sectors: prisons, immigrant detention, bail, surveillance, for-profit colleges and involvement in the occupied territories like the West Bank.
The list includes companies that indirectly support racial injustice, she said. like the food service companies Sodexo and Aramark for their prison work and Amazon for its facial recognition software.
The firm puts all clients into tailored portfolios based on return on investment and social equity. Other areas of focus are gender and economic equality and climate change.
“Allowing investors to pick and choose makes the investor feel good, but it doesn’t push the movement forward, and that’s what we want to do,” she said. “It’s that solidarity that matters.”
Similarly, Ethic, an asset manager that creates separately managed accounts to invest in racial justice and other social responsibility themes, screens out companies that provide services to sectors it does not support. For example, it screens out companies that use cheap prison labor and identifies telephone companies that charge prisoners exorbitant rates to call family members, said Jay Lipman, a co-founder and president.
“Our technology helps you report on what you’re investing in,” Lipman said.
Promoting diversity from within
Twenty-six of the top foundations had 13.5% of their assets managed by firms owned by women or people of color, according to a report released this week by the Knight Foundation, which supports journalism and equitable communities. But in the investment industry as a whole, only 1% of assets are managed by firms owned by women or people of color.
What drove the foundation’s research was a look at its own management structure in 2010. At the time, the foundation, which oversaw $2.3 billion, had only one African American manager, who oversaw a mere $7.5 million, said Juan J. Martinez, the foundation’s chief financial officer.
“We were very surprised,” Martinez said. That prompted the foundation to begin asking about the ownership of investment firms as part of its due diligence process. It now has 30% of its assets managed by women- and minority-owned firms, and its returns have continued to be strong.
He took issue with the assumption that the foundation was not focused on returns and that the minority- and women-owned firms had lower returns. “The data doesn’t bear that out,” he said.
The Rockefeller Brothers Fund, which has an $1.2 billion endowment, announced this week that it would add grants to address racial justice and democracy. But for the past decade, it has been realigning its assets — including grant making, investments and its reputational capital — with its overall mission.
The Rockefeller fund found that it had come up short on the diversity of investment managers, with just 12.3% women or minorities. It has announced it will double that percentage, but has not revealed a timeline.
Beyond investing more in firms owned by minorities, the fund is looking to add firms that have minority leadership and a pipeline of younger leaders. It is also tracking the diversity of the investment portfolio itself, all of which will be published starting at the end of the year.
“The lever for change is the capital itself,” said Stephen B. Heintz, president and chief executive of Rockefeller Brothers Fund. “That in itself has meaning in the marketplace.”
Heintz said the fund’s strategy can be replicated by individual investors, who can ask their advisers how much of their investments are managed by minorities and to press them if they don’t have the answers.
“Those answers at the individual level may not be very satisfying, but more people asking them means the market system works,” he said. “The more you ask for it, the more data you have.”
Pushing for structural change
Investors can also seek larger changes on racial justice through the municipal bonds sold by local and state governments.
The types of revenue that support these bonds vary greatly in credit quality, said Ryan Bowers, a co-founder of the Activest social justice fund. Income from property taxes is the most stable, but many towns and cities derive a large portion from fining their citizens.
When Michael Brown was shot by a police officer in Ferguson, Missouri, a quarter of that city’s municipal budget consisted of fines and fees collected from its predominantly African American base for minor offenses like broken taillights and jaywalking. “The national average then was less than 2% from fines,” Bowers said.
Thousands of other places rely excessively on fines: Chicago, for example, counts on fines for nearly 10% of its more than $3 billion of annual revenue.
“It’s hard to budget for fines and fees without infringing on people’s constitutional rights,” said Napoleon Wallace, a co-founder of Activest.
He said the municipal bond market had not looked closely enough at where revenue comes from. “As a result, you have these municipalities that are operating in the worst interest of their bond holders and their residents,” he said.
Ferguson now derives less than 10% of its revenue from fines and fees, Wallace said. “We believe we have the opportunity to support the places that are doing well,” he said, “and motivate the places that are doing poorly to do well.”
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