Sustainable & Impact Investing
Racial Equity Investing: Opportunities for Impact & Alpha
Racial equity investing seeks to advance racial equity and/or tackle racial inequities in the U.S. while generating financial returns. This investment strategy seeks to close racial disparities in wealth and access to opportunities, resources, and decision-making. Racial equity investing has powerful potential for impact because of its focus on revitalizing socioeconomically marginalized communities. At the same time, this investment strategy may help investors stay ahead of critical demographic trends, serve a growing consumer base, enhance risk management, and identify investment opportunities that can have unique sources of alpha.
People of color are projected to be over half the U.S. population by 2042 and over half the working-age population by 2032.1
Closing the racial earnings gap in the U.S. would generate an additional $2.7 trillion in GDP today and an additional $8 trillion in GDP by 2050.2
Opportunities for Alpha
Racial equity investing can help investors identify unique sources of alpha in three ways:
- Enhanced Financial Performance
Investing in companies that exhibit racial diversity in their leadership and workforces can allow investors to experience the benefits of inclusive, diverse, and equitable companies. Research shows that companies in the top quartile for racial diversity of their executive teams are 33% more likely to have financial returns above their respective national industry medians.3
- New Investment Opportunities
Investing in racially inclusive products or services can allow investors to tap into new market segments with little competition. For example, Brown’s Super Stores established seven grocery store locations in Philadelphia’s food deserts, served 250,000 customers, and generated $250 million in revenue.4
- Risk Mitigation
Avoiding companies that exacerbate racial inequities can help investors mitigate risk in their portfolios. For instance, in 2019, a group of banks publicly announced that they would end future financing relationships with private prisons and immigration detention centers following public outcry over these companies’ human rights violations. From a financial risk standpoint, these banks held $2.4 billion, or 87.4%, of the credit lines and term loans of the two largest private prison companies in the U.S.5
Follow the Flow Advancing Racial Equity in Your Portfolio
Investors can follow the flow of capital to advance racial equity across the investment process by investing in:
- racially diverse investment managers
- racially diverse companies
- business models and investment strategies that advance racial equity
Note: This is not an exhaustive list of all investment firms, managers, or opportunities in racial equity investing and is not a recommendation to invest in any specific product, manager, or approach. Some of these managers do not identify as racial equity investors, but rather, have been identified due to their investments, which in the author’s opinion advance racial equity as categorized above (through applications 1, 2, or 3). This market snapshot is intended solely to provide examples of investors who fall under each category to convey the definitional concepts of applications 1, 2, and 3 across public and private markets.
A Beginner’s Roadmap to Racial Equity Investing
Below is a roadmap for investors, managers, and consultants looking to advance racial equity in their portfolios and firms.
For more information and the full report, please download our whitepaper in the sidebar.
1 U.S. Census Bureau. People of color is a broad term to refer to persons who are non-White or of non- European descent.
2 W.K. Kellogg Foundation
3 McKinsey & Company
4 FSG, Policy Link