The growth in environmental, social and governance (ESG) investing has been driven largely by concern about climate change, but some investors are calling for a greater focus on racial justice after George Floyd was murdered by Minneapolis police in May.
“If there’s systemic racism, then we’re all implicated,” says Rosalie Vendette, a sustainable finance consultant in Montreal.
Clients may wonder whether their investments contribute to the problem and how they can be part of the solution, she says.
The main challenge for now is a lack of company data. Lisa Hayles, investment manager at Trillium Asset Management, a socially responsible investing firm in Boston, has been encouraging companies to disclose more information on employee diversity.
“Most people are well meaning and they want to do the right thing,” she says. “As an investor I also want to have the tools and the data in order to track that.”
The U.S. Equal Employment Opportunity Commission requires all corporations with more than 100 employees to report on their staff’s demographic composition in various job categories, she says. However, there’s no requirement for that data to be made public.
“If you’re trying to understand the approach or where a company is benchmarked, one company versus another, it’s been very difficult because there hasn’t been any consistent, comparable data,” Hayles says.
She was part of a coalition pushing the U.S. Securities and Exchange Commission to require board-level disclosure of diversity, but she says that movement lost momentum following Donald Trump’s election in 2016.
Demand from investors for company disclosures is growing again, she says.
Last month, the U.S.-based Racial Justice Investing Coalition issued a call to investors to address systemic racism.
“We recognize that the investor community has contributed to, and benefited from, racist systems and the entrenchment of white supremacy,” said the statement, which was endorsed by 128 institutional investors.
“We therefore take responsibility and commit to hold ourselves accountable for dismantling systemic racism and promoting racial equity and justice through our investments and work.”
The signatories committed to reviewing portfolio holdings in order to identify investments that reinforce systemic racism, and to either engage with or divest from those companies.
In Canada, changes this year to the Canada Business Corporations Act require publicly traded companies to disclose diversity policies and figures for boards and senior management.
Dustyn Lanz, CEO of the Responsible Investment Association in Toronto, says the regulation “will provide investors with data that is essential for measuring and benchmarking racial diversity within their portfolios.”
It also provides a basis for engaging with companies to push for more diversity, he says.
Vendette says investors can make a case to companies that non-discrimination and diversity create value. Such policies can open new markets for a company’s goods and services, reduce employee turnover and improve a company’s reputation.
“The market is sensitive to reputation,” she says. “No company is immune to controversy, but a company that manages its social and political dimensions, that works on the issue, will build confidence with investors.”
Tim Nash, a fee-only financial planner and founder of Good Investing in Toronto, says there’s still some way to go in terms of developing tools that would flag companies with poor track records on racial justice issues. That’s needed before asset managers develop investment products around the issue.
There is at least one ETF providing exposure to companies with strong racial diversity policies. Launched in 2018 by Dallas-based Impact Shares, the NAACP Minority Empowerment ETF selects companies based on 10 factors including diversity programs, the quality of a company’s discrimination policy, supply chain standards, collective bargaining policy and community development programs.
Companies must report on at least five of the 10 indicators to be included, and can be excluded based on a controversy score that examines incidents involving employees, supply chains and the broader community.
The fund isn’t endorsed or sponsored by the National Association for the Advancement of Colored People, but Impact Shares donates the fund’s net profits to the civil rights organization.
Nash says he doesn’t think there will be many funds focused exclusively on racial justice.
“What I would expect is that ESG options that already exist will now start to use these racial diversity [indicators],” he says.
Hayles also questions the business case for racial justice funds.
“The challenge with the creation of products is that they’re built to appeal to a wide range of investor, which means they may be mild in terms of their screening methodology, their advocacy and their integration,” she says.
Toronto-based Evolve Funds Group provides a cautionary example for niche diversity products. The firm launched a gender diversity fund in 2017 only to close it earlier this year after it managed to gather just $4.3 million in assets. The NAACP ETF has just under US$6 million in net assets.
Still, Hayles says the anti-racism protests and growing calls for racial justice following Floyd’s murder provide an opportunity for ESG investors.
“When something captures the imagination of the public and the media, it’s an easier time to make this kind of ask of companies because everybody’s thinking about it and wanting to show that they’re doing something,” she says.
Vendette agrees, adding that it’s time for companies to go beyond press releases. It’s not enough to denounce systemic racism, she says: companies need to provide the numbers to back up policies and commitments from senior management.
– With files from Didier Bert
A forthcoming article will examine the anti-racism commitments made by financial institutions. Read another recent article that addresses systemic racism in wealth management.