How to Build an Investment Portfolio That Supports Racial Justice

In the wake of widespread outrage and protests against racial injustice, many people are looking at their stock portfolios and asking: What can I do to support racial justice with my dollars?

If you are an investor of any type, whether you have a 401 (k), IRA, or trading account, there are things you can do to promote racial fairness.

ESG investing: the basics

You may have heard of ESG investing, which stands for “environmental, social and governance”. It is also often referred to as a sustainable, socially responsible investment or simply “value-driven investing”. It is an investment strategy that selects stocks and bonds based not only on traditional financial criteria, but also on the impact of different companies on society and the environment.

Supporters of ESG investing point to a growing body of evidence to suggest that sustainable investing can actually improve a portfolio’s performance, while also serving the common good. Over the past five years, sustainable funds have outperformed their conventional peers in both bullish and bearish markets, according to a Morningstar report.

Additionally, as markets fell in the first quarter of 2020, nearly 60% of the largest U.S. sustainable mutual funds and exchange-traded funds lost less market value than the S&P 500.

The popularity of socially responsible investing has exploded in recent years. In early 2020, around 74% of global investors said they plan to increase their ESG allocation over the next year. In the first quarter of 2020, sustainable funds in the United States recorded inflows of $ 10.5 billion, according to Morningstar, a more than 10-fold increase from the first quarter of 2010.

And even though markets fell due to the coronavirus crisis, global demand for ESGs has proven to be resilient. The global universe of sustainable funds recorded inflows of more than $ 45 billion in the first quarter, while the global universe of funds recorded outflows of more than $ 380 billion, according to Morningstar.

The challenges of measuring social impact

What exactly happens in an ESG portfolio?

Environmental factors often include things like carbon emissions and water use. Social impact can involve the working conditions of a company’s employees and gender or race equity. And governance criteria are often linked to board oversight and transparency.

In light of recent events, the ‘S’ – or social – part of ESG has become a priority, as more and more people examine the social impact of large companies, especially from a justice perspective. racial.

This is where things get a bit tricky.

There are more than 300 funds marketed as ESG in the United States, according to Morningstar. But there is no official definition of “socially responsible” investing. To complicate matters further, there are dozens of different companies that issue ESG ratings, ranging from large data providers, like MSCI and Sustainalytics, to smaller companies and even nonprofits that focus on topics such as gender pay equity and civil liberties.

Unlike accounting standards, there is no single methodology. Some of the data is self-reported by companies and some by third parties, who often make estimates.

There are of course general principles, such as how the company treats its workers, but these are often difficult to quantify. For example, companies may score high for having anti-harassment policies in place, without tracking how effectively the policies are implemented.

“There aren’t yet clear apple-to-apple comparisons across the board, even for public companies, let alone private companies,” said Andrei Cherny, CEO of Aspiration, a “finance company with a conscience” , which offers a variety of banking services. and investment products focused on environmental and social impact.

Cherny called on regulators to require state-owned companies to report ESG data, such as carbon emissions, the diversity of their workforce, and how they pay their employees, just as they do. legal obligation to report their financial performance. “These are factors that investors need to be aware of just as much as the price / earnings ratio,” he said.

Other industry leaders echo Cherny’s thoughts. For example, following recent events, Calvert Research & Management, a leading sustainable investment store, called on companies to “accurately assess their racial diversity” and make it public, to provide information on the pay equity based on race and gender, and to publicly declare what they are doing to combat racism and police brutality.

Meanwhile, some asset managers have decided to influence the change from within. Neuberger Berman, which manages $ 330 billion, has decided to use its shareholder status to drive governance and sustainable development practices. In April 2020, the company announced that it would publicly disclose and explain the company’s rationale and voting intentions at more than 25 key annual meetings of shareholders.

“Normally, shareholders vote quietly behind the scenes,” said Jonathan Bailey, ESG manager at Neuberger Berman. Instead, by providing early disclosure of votes, Neuberger Berman intends to educate investors and the public on “why we vote in a particular way,” Bailey said.

For example, in front of the MAR of Marriott International,
At the May 8 shareholders’ meeting, Neuberger Berman announced his intention to vote in favor of a proposal to improve diversity reporting, along with an explanation of why this could affect the financial performance of the company.

“We have the responsibility, as market players, to take [these issues] seriously; these are significant financial issues, ”Bailey said.

The proposal was not accepted because it garnered around 30% of shareholder support, according to a spokesperson for Neuberger Berman.

Niche products focused on racial justice

Although there are currently no industry standards regarding social impact, a few companies have launched niche products specifically targeted at race and equality.

For example, OpenInvest, a company that creates indices and other investment tools around social causes, created an index specifically on racial justice. It examines metrics such as board member inclusion, a diverse workforce, and which companies pollute the most in communities of color.

Likewise, Impact Shares, a nonprofit provider of exchange-traded funds, has partnered with the NAACP to launch a one-of-a-kind racial empowerment ETF.

But what the ESG industry has lacked is that “your social priorities may be drastically different from my social priorities,” said Ethan Powell, CEO of Impact Shares.

For example, some ESG funds hold shares in alcohol or gaming companies. These holdings can be a problem for some investors, but not for others.

Powell envisions a future where “every social issue effectively is reflected in a fund that can be invested separately,” so investors can create portfolios that reflect their individual social priorities. According to Powell, partnerships with nonprofits could play a key role in the development of such products, as social rights organizations are better placed to understand particular social issues.

What many experts agree is that growing investor demand will inevitably push the industry to innovate.

Years ago, socially responsible investing offered only a few options to hedge a small portion of investors’ equity portfolios. Today, there are hundreds of mutual funds and exchange traded funds to choose from, not only in stocks, but also in fixed income and even junk bonds. Research has shown that approximately $ 12 trillion in assets in the United States are managed as part of a sustainable investment strategy.

So, while you wait for the industry to set widely accepted standards, you can begin to build your own socially responsible portfolio by examining the ratings and methodology of different funds and companies and choosing what best fits your values ​​and to your financial goals.

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