One of the major drivers of advisor trust is truly listening to clients and putting their interests first, which includes those clients’ personal values. Advisors can do this by asking exploratory questions such as: How are you and your family doing during this time of social unrest? Or it may be that clients bring up these issues themselves, by discussing protests they attended, or podcasts, books, or documentaries recently brought to attention. Your client may have told you they’ve donated to antiracist or racial justice causes like the NAACP or causes that support Black Lives Matter efforts, or victim memorial or bail funds, as a form of taking action.

Nuveen’s 2020 annual survey found that the majority of investors feel the country is in need of social change (86%). They also feel more engaged in current events than five years ago (77%) and believe consumer and investor pressure will bring about change faster than waiting for the next election (82%).1

This is an opportunity to engage on the ways investors can address social justice in how they invest, in addition to their philanthropic or consumption decisions.

1. Consider The Role Companies Play in Confronting Systemic Inequality

Are they addressing the “S” in ESG?

There is an increased focus on how companies use their platforms to respond to discrimination and injustice. Among the 50 largest U.S. companies, all but four had made some sort of public statement in support of black Americans as of June 4, 2020.2

How companies decide to engage can impact their brand value, reputation, and social license to operate. A recent Edelman report found that 60 percent of consumers surveyed said that brands must take a stand to publicly speak out on racial injustice and systemic racism, and that they will buy or boycott a brand based on if and how it responds to current protests. And 4 times as many respondents said that taking a stand on racial injustice gains brand trust versus loses it, which was shown to be true across the political spectrum.3

How companies respond to and engage with their communities in times of economic uncertainty and social unrest are factors that are evaluated in Environmental, Social and Governance (ESG) analysis and scoring frameworks. The “S” in ESG specifically looks at how companies treat all stakeholders: employees, customers, and communities.

Are they committed to transparency and creating a diverse workforce?

Diversity pays off, literally: three separate McKinsey studies found that the top quartile of firms measured on employee diversity outperform the bottom quartile on metrics like operating profit margin.4 The outperformance appears to be increasing in recent years. The reasons for this are intuitive; countless studies show that diversity attracts better talent, leads to increased innovation, and results in increased consumer satisfaction with products and services that appeal to various demographics.

There has been progress to increase diversity: A Deloitte study found that 38.6 percent of the Fortune 100’s board seats—34 percent of the Fortune 500’s board seats—are held by women and minorities, both increases since 2016. In 2019, women accounted for almost half (46%) of new board directors in the S&P 500, and women of color were 10 percent of new directors.5 However, women and minorities remain underrepresented. Black Americans are represented at very low levels in corporate America, making up just 8.6 percent of Fortune 500 board seats, 3 percent of senior managers, and 0.8 percent of Fortune 500 CEOs.6

ESG research and ratings firms, as well as the asset managers who use that research and build frameworks to evaluate companies on ESG criteria, assess many social factors (the “S” in ESG). Some of these factors include whether a company:

  • Discloses racial diversity, not just gender diversity, across all levels of employment.
  • Discloses pay gap metrics across ethnicity and gender.
  • Sets and discloses diversity goals with time-bound targets and discloses how they monitor and audit progress on those targets.
  • Ties CEO pay to specific diversity metrics. (Microsoft and Intel, among others, have already done this.)7
  • Has implemented a diversity strategy that is effective in not only hiring, but retaining diverse talent, with clear and consistent standards for promotion, and securing commitment at senior levels to overcome bias among middle managers.
  • Provides a living wage to all employees.
  • Commits to protecting employees against discrimination with policies and procedures that facilitate oversight and management of labor rights for employees and supply chain employees and contractors.

Do they serve their customers and the communities in which they operate?

Companies can serve and support their customers and the communities in which they operate by better understanding the social impact of their products and services, and taking steps to provide access and affordability. For example, in the healthcare sector, companies can effectively manage access to essential products and services to communities of color. In the food and beverage sector, an important issue is how companies address food deserts and access to nutrition, which, again, are issues that disproportionately impact minorities.8

In the financial services sector, banks are well positioned to provide access to capital in underserved communities. Providing access to financial services can help eliminate the racial wealth gap. A McKinsey study found that as of 2016, the average black American family had a total wealth of $17,600, which is about one-tenth of the wealth of the average white American family. This puts black families at a significant economic disadvantage, and also makes it so black Americans are underrepresented in the market for financial products and services.9

Nearly half of black households are unbanked or underbanked.10 Without the ability to save and invest, this becomes a vicious cycle where it becomes difficult to translate income into wealth. And, as a result of that, there is discrimination in access to affordable loans. Between 2007 and 2017, minority-owned small businesses grew by 79 percent, about 10 times faster than the overall growth rate for U.S. small businesses during the same time frame.11 And yet, minority-owned firms are much less likely to be approved for small business loans than white-owned firms. And, even if they do get approved, minority-owned firms are more likely to receive lower amounts and higher interest rates.12 Banks play a role in reducing these barriers.

Allocating to sustainable funds that integrate ESG analysis is a way to address these issues.

2. Offer Solutions That Align With Your Clients’ Personal Convictions.

A way to address some clients’ specific concerns more directly is to implement exclusionary screens. Some common specific screens related to social justice include excluding companies that:

  • Are prison operators or companies that finance the prison industry.
  • Are involved in predatory lending practices, which are shown to disproportionately target minority and low-income communities.
  • Produce riot weapons such as tear gas.

More broadly, there are equity and fixed income sustainable funds that address corporate diversity and invest in areas like affordable housing, healthcare, education, and financial inclusion. Cornerstone Capital Group published a report on practical ways to tackle income inequality, access to housing, and access to capital, outlining specific investment opportunities across asset classes to address the racial wealth and income gap.13 Some of these include:

  • Affordable housing real estate investment trusts (REITS).
  • CDFIs and community investment notes supporting small business in low income communities.
  • Funds that increase economic opportunity in underserved communities (e.g., impact-oriented municipal funds and securities).

Jon Hale, Head of Sustainability Research at Morningstar, has also shared insights about other specific ways to activate portfolios to address systemic racism here.

Social justice is not an issue that can be solved by society or government alone. Corporations sit at the intersection of employees, customers, communities, suppliers, and shareholders. Clients who want to address the racial disparities in America can demonstrate their advocacy in many different ways, and one of those ways is where they allocate their investment dollars.

Sources:

1. “Fifth annual responsible investing survey,” Nuveen, last modified on June 12, 2020, https://www.nuveen.com/en-us/thinking/responsible-investing/fifth-annual-responsible-investing-survey.

2. Jeff Green and Gerald Porter Jr., “Silent No More on Race, America’s CEOs Fumble for Right Words,” Washingpost.com, last modified on June 4, 2020, https://www.washingtonpost.com/business/on-small-business/from-goldman-to-apple-firms-seek-new-calculus-on-race/2020/06/04/4bb61fc0-a64a-11ea-898e-b21b9a83f792_story.html.

3. “Special Report Brands and Racial Justice,” Edelman, last accessed on July 16, 2020, https://www.edelman.com/sites/g/files/aatuss191/files/2020-06/Trust%20%2B%20Racial%20Injustice%20One%20Pager_0.pdf.

4. Vivian Hunt, Lareina Yee, Sara Prince, and Sundiatu Dixon-Fyle, “Delivering through diversity,” last modified on January 18, 2020, https://www.mckinsey.com/business-functions/organization/our-insights/delivering-through-diversity#.

5. “2019 Spencer Stuart U.S. Board Index,” SpencerStuart, last accessed on July 16, 2020, https://www.spencerstuart.com/research-and-insight/us-board-index.

6. Phil Wahba, “The number of black CEOS in the Fortune 500 remains very low,” Fortune.com, last modified on June 1, 2020, https://fortune.com/2020/06/01/black-ceos-fortune-500-2020-african-american-business-leaders/.

7. Dina Bass, “Microsoft To Tie Executive Bonuses to Company Diversity Goals,” Bloomberg.com, last modified on November 17, 2016, https://www.bloomberg.com/news/articles/2016-11-17/microsoft-to-tie-executive-bonuses-to-company-diversity-goals.

8. Kelly Brooks, “Research Shows Food Deserts More Abundant In Minority Neighborhoods,” Johns Hopkins Magzine, last modified Spring 2015, https://hub.jhu.edu/magazine/2014/spring/racial-food-deserts/.

9. Aria Florant, JP Julien, Shelley Stewart, Nina Yancy, and Jason Wright, “The case for accelerating financial inclusion in black communities,” McKinsey.com, last modified on February 25, 2020, https://www.mckinsey.com/industries/public-sector/our-insights/the-case-for-accelerating-financial-inclusion-in-black-communities.

10. “2017 FDIC National Survey of Unbanked and Underbanked Households,” FDIC, last modified October 2018, https://www.fdic.gov/householdsurvey/2017/2017report.pdf.

11. “Number of Minority Owned U.S. Small Businesses Growing Rapidly,” Small Business Labs, last modified on October 3, 2017, https://www.smallbizlabs.com/2017/10/number-of-minority-owned-us-small-businesses-growing-rapidly.html.

12. “Executive Summary – Disparities in Capital Access between Minority and Non-Minority Businesses,” Minority Business Development Agency, last modified on April 19, 2017, https://www.mbda.gov/page/executive-summary-disparities-capital-access-between-minority-and-non-minority-businesses.

13. “Investing to Advance Racial Equity,” Cornerstone Capital Group, last accessed on July 16, 2020, https://missioninvestors.org/sites/default/files/resources/Investing%20to%20Advance%20Racial%20Equity.pdf.

The information, analysis and opinions expressed herein are for informational purposes only and do not necessarily reflect the views of Envestnet. These views reflect the judgment of the author as of the date of writing and are subject to change at any time without notice. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

Written by Kiley Miller

Kiley serves as an Associate Portfolio Manager at Envestnet I PMC. She is a member of the Enterprise Portfolio Solutions team and is responsible for asset allocation, manager selection, research due diligence, and portfolio administration for PMC’s impact portfolios, designed for investors with environmental and social impact interests or priorities.

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