Both Black Lives Matter and COVID have made more Americans aware of our society’s major racial disparities. In fact, since COVID’s start, investors have become considerably more interested in making impact investments that will benefit people of color. But that begs the question: Can the sustainable/impact investing movement have any impact on societal discrimination?
Surprisingly, the answer is yes. Thanks to community impact investing, untold millions of dollars have flowed into lower-income communities that have been excluded from traditional financing. And thanks to shareholder initiatives, many publicly traded companies have taken steps to hire, retain and promote more African Americans.
The lack of African Americans in corporate management is seen most clearly at the senior level. Today only four of the Fortune 500 companies’ CEOs are African American, and likewise African Americans are woefully underrepresented on corporate boards of directors.
Shareholder engagement can foster workforce inclusion by convincing companies to release data publicly on employment diversity, and particularly on race and ethnicity. An even greater impact may come from tying CEO compensation to the achievement of specific diversity goals. According to a leading executive compensation firm, only about 78 of the 3,000 largest publicly traded U.S. companies currently tie executive pay to increasing workforce diversity. The number of companies that publicly release data on hiring, retention and promotion of underrepresented groups is also inadequate.
In 2020 and 2021, institutional shareholder engagement on CEO, workforce and board diversity has increased dramatically. These large shareholders meet with senior management to discuss measures to increase diversity. If management is not willing to take steps forward, these institutional shareholders can vote against management’s board members and/or force a proxy vote on releasing company workforce diversity data. A number of the efforts on releasing race and ethnicity data have been successful.
As an added bonus shareholder engagement on diversity may even benefit companies’ bottom lines: There is strong evidence that a more diverse workforce can lead to higher corporate profitability.
What role do individual sustainable investors play in holding companies more accountable for their hiring practices? When you own shares in a mutual fund company, the company has the right to vote your shares in proxy votes. And it is sustainable mutual fund companies that most reliably will lobby management on diversity issues, and if necessary, initiate a shareholder campaign and proxy vote for greater diversity. (Note investors in individual stocks can vote their shares when these diversity issues come to a proxy vote.)
With the dramatic increase in interest in ESG investing, many fund companies are jumping on the sustainability bandwagon without doing any shareholder engagement or having much of a commitment to sustainability. So it is particularly important to consider an allocation in one of the sustainable mutual funds that has a strong record of shareholder engagement or to work with a financial adviser knowledgeable about these issues.
Impact investors provide greater opportunities to lower-income individuals throughout the U.S., whether in Appalachia or our inner cities. Unquestionably, community impact investing has a particularly important impact on helping African American communities. Community impact investing is how individual investors can have the greatest possible societal impact.
Community impact investing focuses on affordable housing, community development and financing small community businesses. Beyond the positive impact of these projects themselves, thousands of jobs are created in these communities.
There are impact investing firms that allow individual investors to get involved with community impact investing. Through their funds, as an example, money is lent to not-for-profit community organizations and social enterprises that typically have not been provided access to traditional financing. A good example is a local community group that focuses on making loans to small-scale entrepreneurs of color, perhaps someone who has been a cleaning person or a child care provider for years.
The person may want to open their own child care or cleaning business but lacks the capital. They may also need some technical assistance getting the loan and opening the business. Who could argue with providing budding entrepreneurs with an opportunity to “pull themselves up by their bootstraps,” as the old expression goes.
Individual investors can purchase these social impact investing bonds through their financial adviser, in most brokerage accounts or in some cases online for as little as $20. Like investing in a certificate of deposit (CD), you should plan to keep the bond until it matures; you can choose terms of one to up to 10 years. These bonds would nicely diversify almost every fixed income portfolio.
You can also make your cash an impact asset. For instance, you can choose a bank that channels many of its loans into low-income communities. One option is the Self-Help Credit Union, and since it is a credit union, most of their products are FDIC insured. Oftentimes the rates are quite attractive.
Another approach is to find a community development bank in your state. For example, you can use the search function at the National Community Investment Fund to find one, http://ncif.org/.
Whether it is investing for community impact, choosing a bank or buying a sustainable fund, retail investors can help make a more just and diverse society. In fact, the more sustainable and impact investors there are, the greater the positive impact there will be.
Vice President, Sandbox Financial Partners
William Bruno has helped clients with financial planning and asset management for more than 15 years. He is now a Vice President at Sandbox Financial Partners, a boutique financial advisory firm based in Bethesda, MD. During his work as a financial adviser he has published articles on sustainable and impact investing and served on the Committee on Sustainable Investing of the Episcopal Diocese of Washington, D.C. Mr. Bruno’s prior career was in public policy and government.
Sandbox Financial Partners, LLC, is a registered investment adviser. This article is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any action with respect to your portfolio. If you have any questions, please contact the firm at firstname.lastname@example.org or 301-214-4190.