Ethic’s Approach to Racial Justice in Public Equity Investing

This is a guest post written by Claire Quigley, a Relationship Management Associate at Ethic. Ethic is an Access Ventures portfolio company that wants to change the way the world invests, by bringing sustainable investment options mainstream.

Since the tragic deaths of George Floyd, Breonna Taylor, and Ahmaud Arbery sparked a summer of protests, the issue of systemic racial injustice has been at the forefront of international conversation. Many are wondering how we can now maintain the momentum of this movement, and address the broken systems that perpetuate this pain.

There are many ways to join the fight for racial equality, whether that’s through peaceful protests, education, or philanthropy (or all of the above!). Here at Ethic, we offer an additional route for activism—impact investing. As a technology-driven asset manager, Ethic creates personalized investment portfolios of public equities, designed to address a variety of environmental, social and governance (ESG) issues. Some examples of our investment pillars—that is, issues we’re focused on tackling—include climate change, education, corporate ethics, and most notably as of late, racial justice.

In the fight for racial equality, we have plenty more work to do, but an easy first step is gaining transparency into your portfolio, so you can begin to shift towards more sustainable alternatives.

We’ve been thinking about these issues through the lens of public equity impact investing for quite some time, working thoughtfully to develop strategies designed to promote a racially equitable society. To that end, Ethic evaluates companies on about 35 different factors that contribute—directly or indirectly—to racial justice, looking specifically at their impact on workers, customers, and the public at large. For those seeking guidance in how they might advance racial justice through their portfolio, we’re highlighting several key areas, some of which are often overlooked when it comes to their profound impact on communities of color.

Perhaps the most intuitive example is a company’s policies around workplace diversity and inclusion: e.g. anti-discrimination efforts, whistleblower protections, equitable benefits, and targets around increasing diversity. Investors should consider whether companies in their portfolio have officially implemented these sorts of policies, as well as the degree to which companies have adopted formalized targets around them. Companies might pay lip service to equitable workplace practices, but how are they tracking their progress toward achieving meaningful targets?

Additionally, many clients are alarmed to find that they are unwittingly exposed to private prisons within their portfolio. Why is this problematic? The U.S. has the highest prison population rate in the world, and despite representing just 28 percent of the U.S. population, Black and Hispanic Americans comprise 56 percent of the nation’s prisoners. While it might be easy to surmise that the prison population simply reflects the perpetrators of crime, evidence actually points toward a criminal justice system that is stacked against Black Americans and that limits social mobility. Ethic helps investors to gain more transparency, examining the corporate supply chain to identify companies that are either directly or indirectly exposed to private prisons. This process might uncover corporations that use inmate labor or partner with others that do, or companies that supply goods and services (e.g. food, telecommunications, transportation) to the prisons themselves.

Products and services that directly harm minority communities is another area worth considering. For example, financial companies’ lending practices can perpetuate systems of inequity, since the majority of people harmed most by predatory lending practices are people of color. We might also look at the tobacco industry, given that in the United States, the morbidity and mortality rates associated with smoking are worse on a per-capita basis for Black people than it is for white people. Companies with responsible marketing practices, labeling and disclosure, as well as those shifting away from these sorts of harmful products and services, represent more favorable alternatives for a portfolio invested in racial justice.

Less obvious, but profoundly disheartening, is the disproportionate impact of environmental pollutants on low-income communities of color across America. Take for example St. James Parish in Louisiana, an 85-mile stretch along the Mississippi River, otherwise known as “Cancer Alley.” Seven out of 10 U.S census tracts with the nation’s highest cancer risks are located in this corridor, which is home to 150 chemical plants and refineries. As of late April, the district’s death rate for victims of COVID-19 is five times higher than the overall U.S. death rate. Polluting industrial facilities, such as manufacturing, metal mining, fossil fuel-based power generation, chemical manufacturing and hazardous waste treatment, are far more likely to be situated in low-income, minority communities. When looking at the companies in your portfolio, consider how they’ve committed to reducing their emissions and waste volumes.

If you’d like to understand whether or not your own public equity investments are exacerbating the issues associated with systemic racial injustice, reach out to your financial advisor. In the fight for racial equality, we have plenty more work to do, but an easy first step is gaining transparency into your portfolio, so you can begin to shift towards more sustainable alternatives.