In a recent report, Cornerstone Capital Group makes the case for investing through a racial equity lens. Arguing that minorities were largely excluded from the New Deal and other 20th-century policies that helped improve economic prospects for white Americans, Cornerstone suggests that the effects of discrimination have compounded over the years. In turn, people of color have possessed less wealth to transfer to future generations, leading to lower education levels, reduced access to capital, and lower rates of homeownership.
The scale of these economic disparities is large, and they take a heavy toll on individuals’ lives and on the economy. The WK Kellogg Foundation estimates that bringing the average income of people of color up to that of white people would create an additional $1 trillion in earnings. It also found that racial health disparities lead to lost productivity on the scale of $42 billion and result in $93 billion in additional medical costs.
Here are three ways investors have applied a racial equity lens to their portfolios.
Helping Minority-Founded Companies Grow
Minority founders don’t receive institutional support at the same levels as their white peers. One strategy to support parity in this space is to seek out minority founders and back their startups. That’s the approach advocated by Arlan Hamilton, who notes that black women make up 8% of the US population but receive less than 0.2% of early-stage venture funding. Hamilton created Backstage Capital to fund startups founded by people of color, women, and those who identify as LGBTQ.
In 2018, Backstage Capital launched a $36 million fund focused on companies founded by black women. Backstage Capital’s portfolio includes renewable energy tech startup Uncharted Power and Airfordable, which offers payment plans for airfare. Hamilton also announced plans to create a startup accelerator with cohorts in four cities to provide mentors and expertise to underrepresented founders.
Standing against Profits from Incarceration
Another impact strategy is to screen for business practices that disproportionately harm people of color. Although it can be argued that the prison system serves the important function of preventing crime and protecting the general population, mass incarceration affects black families at a significantly higher rate than white families. According to research from the Economic Policy Institute, a black child is more than six times as likely as a white child to have a parent who is or has been in prison.
Zevin Asset Management responds to this issue by screening to avoid investing in private prison operators. It also engages companies around the operational, reputational, and policy risks of relying on prison labor in their supply chains—and it urges them to hire people who have criminal records.
Bringing Food to Underserved Communities
Advocates for racial equity argue that systemic racism has influenced the types of goods and services offered in minority communities, resulting in a lack of access to the same products available in white communities. Food deserts, or areas where affordable healthy food is not readily available, disproportionately affect low-income communities and people of color.
Investors have worked to reverse this trend by backing companies like Everytable, which aims to equalize access to fresh food by selling healthy grab-and-go meals at low prices in food deserts. Functioning off a sliding-scale model, the organization’s locations extend to affluent neighborhoods as well, charging what area residents can afford. Everytable has raised more than $10 million to date, and it counts Acumen America, DOM Capital Group, and Kimbal Musk among its investors.
Racial inequity is a systemic problem, which means no silver bullet can solve it. Because issues that impact minority communities interact with and reinforce each other, addressing only one need—whether it’s household wealth, homeownership, or educational attainment—won’t eradicate injustice. At the same time, racial inequities can be exacerbated by other societal inequities like the gender pay gap. This complexity means there’s room for creative innovators and new collaborations between existing programs. Although investors can’t expect a single financial product or impact strategy to fully eliminate racial inequities, investing with a racial equity lens offers targeted ways to focus the problem.