Investing for social justice

When Adasina Social Capital launched an exchange-traded fund focused on racial justice three years ago, there were very few products in that category. Today, that’s still the case.

That is evidence that the “S” in ESG has all but disappeared, as nearly all such products focus on environmental or climate issues, rather than social ones, Adasina CEO Rachel Robasciotti said.

“There aren’t many funds doing this work consistently,” she said, the reason being that “finance doesn’t believe that it has had anything to do with racial injustice.”

Currently, there are about two dozen US mutual funds and ETFs that address human development, according to data from Morningstar Direct.

It’s notable that Wall Street was physically built with slave labor and that, beginning in 1711, it was the home of New York’s slave market, where affluent whites bought, sold, or rented out the Black men, women, and children they claimed to own.

“There has been an extraction from the Black community… Those who acquired wealth in the Americas – disproportionately, that came from owning human beings,” Robasciotti said. “The actors in the financial market don’t understand the origins of the huge amounts of capital we’re dealing with… We have a huge debt to pay.”

Investors who want their money to have a positive effect on the Black community don’t have a lot of options in the form of mutual funds and ETFs, but advisors can help them align their portfolios with social justice goals.

A COMPONENT OF WIDER EFFORTS

Of course, investing can only do so much, but it can be a component of wider efforts to address inequality and systemic racism. Over the past 50 years, the wealth gap has increased, with Black Americans having significantly lower incomes, assets, and homeownership rates than white Americans, data compiled by the American Civil Liberties Union show.

“This industry can do so much in this area,” said Miranda Reiter, assistant professor of personal financial planning at Texas Tech University. “We’re working up against centuries of barriers, policies, segregation, and discrimination that have stalled or prevented building wealth… There is still just such a capacity for bringing our business, our services to people who don’t know we are here.”

For investors who want to align their portfolios with social justice values, Robasciotti suggests asking advisors three questions: What impact issues are the investments addressing? How are you measuring and interpreting that impact? And how are you solving for racial injustice?

“In finance, we spend a lot of time talking to each other about the data that exists in our industry,” she said. “Who’s determining what ‘impact’ means? If it’s just finance folks looking for DEI solutions, we’re not going to have the full scope of solutions at our fingertips.”

Demand for that is there. The company’s $152 million Social Justice All Cap Global ETF has brought in net inflows consistently since its December 2020 inception, she said.

Adasina uses 40 metrics for assessing holdings, and its ETF excludes companies that don’t fit social justice criteria. Because of that, the firm works with third parties on shareholder advocacy, including filing resolutions, as it doesn’t invest in companies that would be targets of social justice campaigns.

ETF BENEFITS THE NAACP

Another ETF, the Impact Shares NAACP Minority Empowerment ETF, tracks Morningstar’s Minority Empowerment Index. The ETF benefits the NAACP, and the sponsor, Impact Shares, is a non-profit.

“Our mission is to work with leading social and environmental advocacy groups to launch more credible ESG-oriented strategies,” Impact Shares chief executive Ethan Powell said.

Companies in the ETF’s portfolio measure 50 percent better on minority outcomes than the broader sector, he said. The firm also engages with public companies to get them to change policies and practice so that they might be included in the index.

“Post-George Floyd, DEI initiatives had a lot of tailwinds,” Powell said. Recent campaigns by politicians against ESG appear to have made some of the bigger asset managers more careful about how they approach it. “DEI seems to be being marginalized right now, but that will reverse course.”

As anti-ESG efforts have increased at the state and federal levels, and in the wake of the Supreme Court’s decision banning affirmative action, large asset managers appear to have backed away from DEI efforts, fearing litigation, he said.

Increasingly though, public companies have become much more willing over the past few years to publish the Equal Employment Opportunity data that they file with the Department of Labor. Shareholder resolutions have focused on getting companies to do so but are now going further, asking employers to conduct racial equity audits.

Of the more than 20 corporate engagements As You Sow initiated last year, over 80 percent of the companies voluntarily agreed to release employment data, said Meredith Benton, founder of Whistle Stop Capital and As You Sow’s workplace equity program manager. But among shareholder resolutions on social issues that went to proxy votes, support by large asset managers plummeted in 2023, data from Morningstar show.

Benton said she worries “that a subset of asset managers was prioritizing political concerns over their obligation to vote the proxies in the best interest of their clients,” as “the rationale of the understanding and importance of manager diversity has only increased.”

A CHILLING EFFECT

The campaigns against DEI appear to have had a chilling effect among asset managers, Robasciotti said.

“It distracts people to worry about whether they will be a target for focusing on these issues,” she said. However, “backlash is a huge indicator of progress. It means that [the DEI effort] is working.”

Amid all of this, there are more tools than ever for financial advisors who want to brush up on investment options that address inequality. Research analysts at RIAs or broker-dealers, for example, can provide short lists of funds for advisors who want to be able to offer social impact investment options for clients.

“It could be such a great marketing tool for an advisor to say, ‘I offer this,’” Reiter said.

Companies that do the work to help address wealth gaps or systemic racism don’t usually get accolades for doing so, but investing in them shows support, she said.

Advisors should also talk with clients about how and why they want to support social causes, to determine what role their investments should play in that, she said. “The ‘why’ really matters here. It’s a matter of doing it for the right reasons.”

The biggest impact an advisor might have comes through working with people who historically have been underserved in financial planning. A client might be the first in their family to have access to an advisor, and that means there are relatives who could use help, Reiter said.

“It means something so much more when we’re talking about the Black community,” she said. “There are people who are Black at the upper echelons of society, based on their incomes and jobs, who are still on the outside of our industry. They don’t know who to contact. They don’t know who to trust. There is so much opportunity for an advisor to change the tides of families, [starting] with just one client.”