Institutional Investors That Can Parse the Vast Landscape of Racial Equity Issues and Ask the Right Questions of Investment Managers Will Have Leg up
BOSTON (July 11, 2018) – A new report by investment firm Cambridge Associates on social equity investing – the practice of making financial investments that promote equal opportunity for all, regardless of background – points out that when those allocations focus on racial equity, the potential social-problem solving and financial benefits are accentuated.
Social equity opportunities for institutional investors span such issues as education, civil rights, transportation, affordable housing, financial inclusion and health — and racial equity cuts across all of them, according to “Social Equity Investing: Righting Institutional Wrongs.”
“The legacies of racism and racial barriers are deep and complex, and data indicates that inequities of nearly any kind tend to be more pronounced for people of color. Investing to advance racial equity demands particular attention to and understanding of the interconnectedness of social equity’s underlying themes,” says report coauthor Erin Harkless, a Senior Investment Director focused on Mission-Related Investing at Cambridge Associates.
The report underlines the financial and economic upside of effectively addressing racial inequity, as communities of color represent the fastest growing US consumer markets. It cites research that shows that the combined buying power of blacks, Asians and Native Americans was $2.2 trillion, up 138% from 2000, and that of Hispanics increased by 181% to $1.4 trillion. Further, raising the average income of people of color to the average incomes of white people would generate an additional $1 trillion in earnings.
Given the economic potential of investments that help address racial inequality, parsing the avenues for effective allocations is a critically important step for institutional asset owners with social equity goals, the report says.
“In our view, investment strategies focused on racial equity can be divided into two areas. The first includes strategies that increase capital access for and allocations to communities of color and that begin to tackle the ongoing capital gap that besets these communities. The second area involves business lines and practices – in other words, strategies that aim to ensure that existing businesses, products, services and policies support communities of color,” said Ashley Cohen, coauthor of the report and Senior Investment Associate at Cambridge Associates.
Capital access and allocation strategies might include identifying and tilting the search for investment managers towards firms that are owned or led by people of color; investing in a venture strategy with a particular focus on racially and ethnically diverse entrepreneurs; or allocating to consumer services related to health, wellness and food systems, the report says.
Strategies that focus on business practices might include backing start-ups that create affordable and accessible financial tools; embarking on a public equity investing approach that favors companies with superior social practices; or using shareholder advocacy to encourage companies to improve their diversity approaches.
With that backdrop, the report highlights questions that institutions pursuing such allocations should ask about investment managers under consideration:
- Do the managers have the cultural know-how and acumen to address the needs of racially diverse communities?
- Are the managers themselves espousing inclusive principles throughout their organizations? Do they have programs around diversity and equity?
- Are the managers acting to involve the community directly in the investment decision-making process and leveraging the expertise and voices of community members?
- Have the managers thought about any undue risks that communities might bear that could run counter to institutional investors’ impact goals?
Harkless continued, “The discipline of racial equity investing is exciting and, we believe, of immense importance to society. There has been continued demand from our clients – endowments, foundations, private clients, and pensions – to develop portfolios that address diversity and equity. We expect that the growing prominence and focus on these allocations will yield a more robust opportunity set – due both to new entrants and existing players pivoting to address racial equity via their investment portfolios. Already we’ve seen more investment managers articulating strategies that have an impact on communities of color.”
About Cambridge Associates
Cambridge Associates is a leading global investment firm. We aim to help endowments & foundations, pension plans, and private clients implement and manage custom investment portfolios that generate outperformance so they can maximize their impact on the world. Working alongside its early clients, among them leading university endowments, the firm pioneered the strategy of high-equity orientation and broad diversification, which since the 1980s has been a primary driver of performance for institutional investors. Cambridge Associates delivers a range of services, including outsourced CIO, non-discretionary portfolio management, and investment consulting.
Cambridge Associates maintains offices in Boston; Arlington, VA; Beijing; Dallas; London; Menlo Park, CA; New York; San Francisco; Singapore; Sydney; and Toronto. Cambridge Associates consists of five global investment consulting affiliates that are all under common ownership and control. For more information, please visit www.cambridgeassociates.com.