Done right, racial equity investing can dismantle oppressive structures. Here’s how advisors and investors can avoid the wrong approach.

Danielle Burns, vice president and head of business development for CNote, speaks during a panel about racial equity investing hosted by the Croatan Institute as Sharlene Brown, Homero Radway, David Sand and Justin Conway listen on.

The ability to make a difference in marginalized communities through fixed income investing is expanding.

For an increasing number of investors, that goal has become a top priority. As the nation and the financial services industry push for change, opportunities to make money while supporting efforts to address racial inequities are growing as well.

But how can advisors and their clients work together to create a portfolio that successfully does that while mitigating risk? And what role does the legacy of institutional racism in the United States play in creating barriers in that pursuit?

Those topics and more were on tap during a webinar held this week by the Croatan Institute as part of its “Redirecting Capital to Accelerate Racial Equity” series. The nonprofit research organization that focuses on using finance to advance social equity and sustainability has hosted a number of events with experts in the space following the publication of a new roadmap for racial equity investing titled “Capital at a Crossroads” in October 2021.

The report says heightened awareness around issues of race and inequality has supported the emergence of investment approaches that center BIPOC lives, as well as approaches based in restorative economics principles.

At the same time, fixed income investments provide additional opportunities for investing with a racial equity lens.

Moderated by Croatan Senior Fellow Sharlene Brown and featuring remarks from four fixed income practitioners, this week’s discussion dug into the differences in fixed income opportunities offered through public and private debt options; the lack of access entrepreneurs of color have to non-extractive forms of finance; and private fixed income strategies that incorporate explicit racial equity considerations.

Here are a few takeaways from the more than hourlong event.

What is racial equity investing?
Brown kicked off the conversation by explaining that while the concept of racial equity investing is one that's been embraced by many investors and asset managers, a lack of understanding remained. So the Croatan Institute came up with a definition that encompasses three essential pieces needed to say that racial equity investing is actually taking place.

“The first of which is that racial equity investing must dismantle racist systems and structures,” Brown said. “I think each of us recognizes that organizations and systems in our society, particularly here in the United States, given the legacy of slavery and discrimination that has persisted in communities of color, these systems have to be changed. And part of that change is really an assumption that we need to do a lot of work around evaluating processes and systems that continue to perpetuate discrimination, even if it's implicit.”

The second piece of the definition is focused on allocating capital to support opportunities in marginalized communities.

“I think this is the piece where the industry broadly has had some success,” Brown said. “Lots of investing has been done targeting community investing historically, but oftentimes we have not had the very explicit conversations around the history of the United States and the racist structures which perpetuate the inequality that we see in our nation.”

The third piece of the definition is focused on measurements of outputs and outcomes. Brown said as we work toward systemic change, we need to measure the results of our investment actions to see if positive change is actually taking place.

“I would argue that if we're not seeing positive change, then something isn't quite right and that we need to retool how we're thinking and engaging with communities of color,” she said. “I think ultimately if we're successful, what this type of investing will lead to is increased opportunities for communities of color, which means increased wealth. And hopefully the number that we see … in terms of the racial wealth gap, will start to shrink.”

Pushing for systemic change
David Sand, chief impact strategist for Community Capital Management, said that it is unfortunate to still find so many examples of historic and structural racism.

He said Community Capital Management, an impact and ESG investment management firm that oversees $4.2 billion in impact investments, is trying to dismantle those systems in two major areas.

“One is redlining, which we all know about and is now illegal. But the echoes and the waves of it continue generation after generation,” Sand said. “One of the ways that is essential to look at redlining for financial services and counter the legacy of redlining is to be more affirmative and proactive in directing capital … into those communities that have been historically disenfranchised and toward those individuals who've been historically disenfranchised.”

The other approach is focused around sustainability and climate change impacts. Sand said it is still not widely accepted and understood how much the front lines of climate change are based in low- and moderate-income communities.

“Every time there's a natural disaster, we focus on the natural disaster, and we see that it's related to climate change. But we don't always see that the brunt of it is felt by people in the communities least equipped to handle it because of where they've been located, and because of the underinvestment that's gone into those geographies, those businesses, those homeowners and those communities,” he said. “So we encourage our clients — and our clients thankfully encourage us — when we're looking at climate change-mitigation strategies to focus them on communities of color where they can do the most to help. And hopefully that helps with resilience to withstand what seems to be coming our way, whether we like it or not.”

The investing power of Black women
Danielle Burns, vice president and head of business development for CNote, said the most crucial component of systemic change that her company is working on is women of color.

“Specifically Black women as a really critical piece of the puzzle,” she said. “When we think about addressing systemic poverty and economic inequality, Black women represent a tremendous GDP opportunity for our country.”

Burns then referenced a 2021 McKinsey & Company study, which found that if Black-owned businesses could reach financial parity with their white counterparts in terms of revenue, it would represent hundreds of billions of dollars in additional annual GDP. The study also found that in a parity scenario, Black-owned businesses would generate $1.6 trillion more than they do today.

Burns said CNote created an initiative called the Wisdom Fund as a fixed income vehicle to increase capital access for businesses owned by women of color and chip away at that disparity. They also conducted analysis over the summer to address the perception that women of color are a greater credit risk.

“When you ask for the data to really support that, you sort of get crickets because there hasn't been any to show that they are indeed a credit risk,” Burns said. “We don't want to pretend to know the story of how women of color entrepreneurs are navigating the challenges. We wanted to hear directly from them about how and where the system is failing them in terms of getting the access and the capital they need.”

Burns said the findings of CNote’s analysis were full stop: Women of color are not riskier borrowers than other demographics, and statistically there was no significant difference between the credit risk of women of color and other borrowers.

“Additionally, women of color on average had a lower credit risk than men specifically, and they had a lower default rate between 2% to 5% when compared to white males,” she said. “Despite those findings, women of color still typically receive loan rates that were higher, and loans that came with all kinds of other stipulations that other demographics didn't have.”
Shifting power and adding seats to the table
Homero Radway, senior analyst for Activest, said systemic change via impact investing starts with a power shift at the decision-making level. While investors may have opportunities to allocate dollars to underserved communities, long-term change will stall out if those determining how those dollars are used aren’t in tune with the communities they represent.

“I think it’s the process of having some expansion of participatory budgeting so people can be at the table to really speak to what they want for their communities,” he said. “What kind of infrastructure? What kind of help? What is essential now? And I think that is a shift of power that is needed in order for communities to get what they really need and what they really want.”

In terms of measuring outcomes and ROI for investor dollars, Radway said once investments have been made, honest conversations about whether or not those investments are truly adding value to a community need to take place.

“If it's building on economic development that displaces a historic community, that isn’t really adding economic value to the overall community,” he said. “It’s not making the whole community’s life better. It is really kind of substituting residents with higher-paying residents and transferring out communities.”

Another big part of that power shift is engaging bondholders from being allies to becoming activists, Radway said.

“It’s having bondholders understand that they are also on the hook for future decisions in a similar way,” he said. “We have to all be in it together so we're not just excluding bad actors but shifting how policy and racial equity is being thought about and calculated.”

Moving beyond the old ways
Justin Conway, vice president of investment partnerships for Calvert Impact Capital, said beyond the moral imperative of racial equity investing, there is great financial risk in inaction.

“Being stuck in the old ways and models and not taking into account the long-term economic health … I think we're going to need a lot more education and understanding on that,” Conway said. “I think it will require some more open and honest conversations engaging both the investors as well communities in terms of transparent terms, fair returns and real versus perceived risk.”

He added that one of the most important things people in this space are doing is building track records to show the viability of racial equity investing.

“We’re showing that you cannot only successfully invest in low-income and BIPOC communities, but you can also do deep engagement and be a real partner. Be transparent, be fair, and there are ways to do that,” Conway said. “Beyond our strategy, we hope that it really encourages more and more (people) to get involved.”

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