Racial Justice Investing: Understanding Its Purpose and Impact

Adam Hayes, Ph.D., CFA, brings over 15 years of Wall Street expertise as a derivatives trader and financial writer. With a master's degree in economics from The New School for Social Research and a Ph.D. in sociology from the University of Wisconsin-Madison, Adam specializes in economics and behavioral finance. He holds CFA and FINRA Series 7, 55, and 63 licenses and currently researches and teaches economic sociology and finance at Hebrew University in Jerusalem.

What Is Racial Justice Investing?

Racial justice investing is a specialized branch of socially responsible or impact investing that focuses on advancing racial equity, diversity, and inclusion through targeted investment decisions. This strategy involves selecting investments in companies that actively promote these values, such as Black-owned enterprises or firms with diversity hiring policies, while avoiding those that negatively affect communities of color, like private prison operators or gun manufacturers.

This investment approach acknowledges the significant influence institutional investors wield in financial markets and recognizes the historical role the investment community has played in perpetuating systemic racism and white dominance within the financial sector.

Key Insights

• Racial justice investing integrates social responsibility with financial strategy to support racial equity and inclusion.
• Investment opportunities include supporting Black-owned businesses and startups led by people of color.
• Financial products like the Impact Shares NAACP Minority Empowerment ETF (NACP) provide dedicated avenues for racial justice-focused investing.

The Rise of Racial Justice Investing

Impact investing, which aims to generate measurable social benefits alongside financial returns, has grown rapidly in recent years. By directing capital towards underserved communities and socially beneficial sectors, investors can contribute to positive societal change. Racial justice investing is a vital subset of this movement, channeling funds to promote equality and dismantle systemic racism.

Institutional investors are increasingly evaluating their internal diversity and inclusion practices, committing publicly to racial justice, and prioritizing partnerships with vendors who share these commitments. Forbes highlights that such investors are actively working to enhance board diversity and support economic empowerment for underrepresented minorities.

Commitments and Public Pledges

In response to social justice movements, many financial institutions have made public pledges to combat racism and foster inclusion. The 2020 Belonging Pledge by Confluence Philanthropy, for example, encourages investors to prioritize racial equity discussions and share progress transparently. By March 2022, 187 institutional investors managing $1.88 trillion in assets had endorsed this pledge.

Similarly, Racial Justice Investing (RJI) issued a solidarity statement recognizing systemic racism's deep roots and calling for investor responsibility in dismantling these structures. This pledge has been supported by 188 institutional investors as of March 2022.

Additional pledges with aligned missions continue to gain traction among investors of varying sizes.

Active Investment Strategies

Beyond pledges, investors are actively channeling funds into firms owned or managed by people of color and selecting portfolio managers with diverse teams. Research from Harvard Business School and the National Association of Investment Companies shows that diversity in investment management correlates with competitive or superior financial returns.

Investing in companies with diverse boards also demonstrates financial benefits, with data from The Carlyle Group indicating significantly faster earnings growth linked to board diversity.

Investors may also support real estate projects that provide affordable housing in underserved communities, while avoiding investments in entities known for predatory practices or negative impacts on communities of color.

Opportunities for Individual Investors

While institutional investors lead much of the racial justice investing movement, individual investors can participate as well. The Impact Shares NAACP Minority Empowerment ETF (NACP) offers retail investors a focused vehicle to invest in companies aligned with racial equity goals, backed by the longstanding civil rights organization NAACP.

As of March 2022, NACP’s top holdings include major technology and innovation leaders such as Apple, Microsoft, Amazon, Meta Platforms, Tesla, NVIDIA, Alphabet (Google), Cisco, and Salesforce.

Additional Concepts Explained

What Is an ETF?

An exchange-traded fund (ETF) is an investment vehicle that pools assets to track a specific index, sector, or strategy. Unlike mutual funds, ETFs trade on stock exchanges like regular stocks, offering flexibility and diversification.

What Is Cleantech?

Cleantech, or clean technology, refers to innovations aimed at improving environmental sustainability, including renewable energy, recycling methods, and reducing the environmental footprint of traditional technologies.

What Are Assets Under Management (AUM)?

AUM represents the total market value of investments managed by an individual or institution on behalf of clients. Definitions may vary, but it generally includes discretionary investment funds.

Who Are Institutional Investors?

Institutional investors are organizations such as mutual funds, pension funds, and insurance companies that manage large pools of capital on behalf of others. These investors often have significant market influence and operate under different regulatory frameworks compared to individual investors.

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