The “S” or “social” in ESG often doesn’t get the same attention as its precursor – but a panel at a forum last week took a wide-ranging look at racial justice in the investing world.
Investors gathered at a conference organized by the The Forum for Sustainable and Responsible Investment (US SIF) in New Mexico to discuss a myriad of ESG topics with this panel focused on the ‘social’ element as well as building wealth for a diverse range of clients, supporting career advancement and considering the use of community development financial institutions in portfolios.
ESG “has risen without a racial equity lens,” said Tynesia Boyea-Robinson, president and CEO of CapEQ. “One of the reasons why ‘S’ and ‘G’ are so unpopular is that it has risen on the back of racial inequity.”
To help change that “there is an education and awareness process for people to follow their money,” Boyea-Robinson said.
Several years ago, a Louisiana-based client of NorthStar Asset Management raised concerns over prison labor, including whether workers are paid fair wages, said Ivy Jack, head of equity research at the firm.
“Louisiana incarcerates more people than most countries in the world,” Jack said.
In addition to outside investors, clients are invested in a public equity product, which has included stock in Costco, a company who has more than a dozen suppliers that use prison labor.
In engaging with that company, which included a shareholder resolution in 2018, NorthStar helped nudge it to drop suppliers that did not pay fair wages for prison labor.
As of this year, Costco reports having 14 known suppliers that use prison labor, and all of those suppliers have indicated plans to phase out the practice by the end of 2022, according to a statement from the big-box retailer.
NorthStar has stayed away from private equity and venture capital investments, Jack said.
“When you look at the structure of VC and PE, it is structured so it benefits the investor. It is not structured so that it benefits the employees at the firm,” she said.
NorthStar has so far not found any that appear willing to change their structure so that the community benefits as much as the top three or four investors, she noted.
“At this point, it is about community. I am going to be happy whenever I see some Black or Brown achieve. But I am happier when I see lots of Black and Brown people achieve,” she said, responding to a question about whether the firm considers VC or PE firms with BIPOC leaders.
“There is no reason for a country as rich as ours to have people hungry – to not have food and shelter.”
But investing also involves tradeoffs, she said.
“There is no perfect company,” she said. “We are all complicit. That is the just the bottom line.”
Community development financial institutions
It would be hard to have a conversation about racial justice in investing without mentioning CDFIs, and that topic came up frequently in the discussion.
There are more than 1,300 CDFIs in the US, representing more than $222bn in low- or no-interest loan assets under management, according to figures from Opportunity Finance Network.
Those lenders “see opportunity where others see risk,” said Lisa Wright, senior vice president of investment and portfolio management in financial services at Opportunity Finance Network.
The mission is to bring fair financing to communities overlooked by traditional lenders, and that often means using metrics beyond credit scores in approving loan recipients.
“To make real progress on the S [in ESG], it does really start with the community,” Wright said.
But convincing financial advisers to broadly embrace CDFIs can be a tough sell.
“The whole notion around a 0% rate of return is something that our industry really has to grapple with,” said Nicole Middleton Holloway, an adviser at Natural Investments.
Clients can get their principal back, she noted, and using CDFIs within a bond portfolio that will likely have low yield anyway makes sense for investors who want to use their assets for impact.
Helping more clients
In her practice, Holloway said she focuses on younger clients, predominantly women, who have often recently inherited money and are interested in impact investing, rather than building wealth through the status quo.
“A lot of them carry a lot of shame in how they inherited their wealth in the first place,” Holloway said.
As an adviser, she wants to accept all clients, but working with people who are just starting to build wealth can be challenging, she said.
“It’s very hard to survive as an adviser who is really not a W2 salaried [worker] and make it, and focus on that kind of demographic,” she said. “But you can provide hourly planning” for middle-income people, who are often interested in sustainable and impact investing.
Among her recommendations are funds that are focused on building economic power for communities rather than just investors, she noted.
Holloway is herself a recipient of financing from Runway, a “100% Black and Brown-women led” organization that “helps build Black community wealth through early-stage funding, holistic business support and innovative financial products and partnerships,” that group states.
“I’m a real-life example of the power,” Holloway said. “That was my first experience raising capital.”
Attracting BIPOC professionals
A question from the audience was what the ESG investing world could do to get more diverse advisers and workers.
“Until my firm found me, I didn’t even know this space existed seven years ago,” Jack said.
Internships are critical, as are scouting talent from historically Black colleges and universities, rather than just a handful of ivy-league schools.
Firms should also consider hiring promising workers who do not necessarily have the specific job experience, and that can mean adjusting the job’s requirements and shuffling responsibilities to other staff, Jack said.
“You’re overlooking a lot of talent that is out there,” she said. “From a structure perspective, you have to behave a little different to get something different.”
And retaining workers is about more than compensation, Jack noted.
“It’s not just about bringing people in – you’ve got to retain them,” she said.
“You also have to adjust the climate and the culture. And then, going forward you will find more people like us.”
