Why investing in racial equity through stocks is so complex

Despite critical questions around publicly traded companies’ commitments to racial equality, some wealth and asset managers are already driving change through clients’ stock choices.

After earlier sessions examining how to do so across a clients’ portfolio and through fixed-income investments, nonprofit research organization the Croatan Institute’s Racial Equity, Economics, Finance, and Sustainability program held a panel last month among RIAs and sustainable investment managers about applying a racial justice lens to equities. In addition to potentially joining the coalition of investors, asset managers and businesses that have endorsed the Racial Justice Investing pledge, financial advisors can tap into a rising level of activist shareholder proxy votes seeking to hold publicly traded firms accountable for their impacts.

“It's not simply the individual companies we're investing in, though that is important. We have a screening process which avoids companies which have some of the more egregious practices — payday lending, for example,” said Lisa Hayles, the director of international shareholder advocacy at Trillium Asset Management. 

“Because of the way our economy is structured, the way finance works, racism is deeply embedded in every aspect of what we do. You know, it's kind of like the air that we're breathing. And so as someone who's in the system, part of the system, benefiting as a representative of asset owners, we're trying to use every single tool — our votes, our research process and our advocacy — to expand the way we can bring these discussions to companies in our portfolio and to other investors.”

Another aspect of the growing movement revolves around the selection of investment managers in an industry in which the latest research from the Knight Foundation shows that only 1.4% of assets under management are with firms that are majority owned by women or minorities. Few types of investments pose as many options in manager selection than equities. At Englewood, New Jersey-based Pathstone, a family office that is one of the largest fee-only RIAs in the country, the company is “rearranging our survey” of asset managers after its first version last year, according to Managing Director Craig Metrick.

“We are proactively collecting and reporting to clients racial and gender diversity information on all of our approved managers, not just the ESG or sustainability managers or impact managers,” Metrick said. “We want to show clients and show managers that we want this data. Increasingly our clients and prospective clients are asking for this data. And so that's part of the education process.”

However, both Metrick and Keith Beverly, the founder of Washington, D.C.-based practice Grid 202 Partners, say that compiling data about publicly traded companies in order to inform investment decisions from a racial equity perspective often proves difficult. The moderator of the panel, Croatan Senior Fellow Sharlene Brown, asked the panelists how public equities could lead to a “power shift that gives people greater voice and presence” amid the historical and present-day backdrop of the wealth gap between Black and white households.

For Beverly, the concept represents a difficult balance when looking at companies with a national and global presence and the more local discussions of how they’re “engaging communities throughout the country around particular issues,” he said. For example, housing access and affordability is a national issue that plays out differently in specific places.

“You can look at certain communities and talk to folks in those particular communities. You could also look at where companies are headquartered,” Beverly said. “If you're really talking about a power shift and giving voice to communities of color that are impacted by public equities, it has to be on the state and on the local level and coordinating amongst shareholders and coordinating amongst those in the communities.” 

At a national level, more companies’ activist shareholders are winning approval of proxy resolutions demanding that firms conduct audits of their impact on civil rights or racial equity. Shareholders of Apple, Johnson & Johnson and Waste Management voted in favor of audits this year after others such as Amazon, Citigroup and Tyson Foods have previously agreed to conduct their own reviews, Bloomberg News reported.

While it’s “an iteration” that remains in progress, the industry is getting “even more focused” on racial equity, said Marcela Pinilla, the director of sustainable investing with Zevin Asset Management.

“We've made a lot of progress there,” Pinilla said. “Impact investing outside of the public markets can move money directly to marginalized groups. And we can't directly do that in public equities. Shareholder advocacy is how we get the closest to the front lines of the impact to then being intentional about what we want to change.”

On the other hand, critics from many sides of the political discourse are casting doubt on the effectiveness of certain ESG criteria often accused of “greenwashing” or taking an approach in line with the Biden Administration’s goals. Despite making some gains in recent years, adherents of racial equity investing face substantial challenges, said Hayles of Trillium.

“Though I'm by nature an optimistic person, I also am very clear-eyed about the pushback that is currently underway,” she said. “It is significant, it is sustained, and, I think in this community, we have to be very strategic about our own approach and how we think about both positioning ourselves and the work that we need to do in order to advance our goals.”     

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ESG Investment strategies Stocks Diversity and equality
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