Investing in Racial Justice with ESG

How should investors and their advisors think about racial justice from an ESG perspective? Amidst a global moment of reckoning on systemic inequality and oppression, this question highlights the financial industry’s existing challenges - and illuminates some of the pathways to progress for a sector with a unique role and responsibility to channel social momentum. 

The murder of George Floyd on May 25th set off a chain reaction whose most tangible results may be seen in police reform — but it also reinvigorated long-fought battles against racial inequities across every tranche of American society.  

For the finance industry, and for proponents of ESG in particular, this moment has revealed an urgent demand for rigorous frameworks that enable the comparison of companies’ performance against racial justice indicators.  Generating such data and making sense of it is squarely in the ESG industry’s purview.

This push to invest in racial justice is inscribed within a broader recognition of ESG’s relative weaknesses in evaluating companies’ ‘S’ performance.  Indeed, it was only a few months ago that the shock of COVID-19 revealed how far environmental measurement frameworks, for example standardized metrics for evaluating sector carbon footprint benchmarks or GHG measurement methodologies, have outpaced social performance indicators, notably around labor practices and employee healthcare.

There should be a bit more rigor around the analysis of social now...if you think about the heavy emphasis on risk and disclosure around climate, we're nowhere near that on the social side.
Kara Mangone, Chief operating officer of Goldman Sachs Group Inc.'s sustai

With the intersectional nature of structural inequities laid bare by both the pandemic and the Black Lives Matter movement, companies are grappling to meet the moment in ways that adequately address not only investors’ demands but those of a widening and increasingly influential coalition of stakeholders.

For investors seeking to separate performance from performativity, what is the proper way to evaluate these actions? How do you break down the impact corporations can have with respect to racial justice, and how do you quantify companies’ actions across indicators that are relevant, rigorous, and meaningful to diverse stakeholders’ racial justice priorities?

Fortunately, existing approaches provide a foundation for comparability.  The NAACP, for example, has been scoring companies for at least 25 years based on factors such as C-suite hiring, supplier diversity, and community engagement.  

New approaches are emerging as well that offer additional rigor and nuance. OpenInvest’s Racial Justice Cause integrates best-in-class frameworks like the NAACP’s on top of additional layers that screen for metrics like board member inclusivity, flag companies with records of diversity-related controversies and, leveraging location-based investing, companies that pollute most in communities of color. 

Such technology-enabled innovations unlock a new frontier in the precision of racial justice investing strategies, like divestment from states pursuing discriminatory legislation - approaches which have proven effective in translating social movements into social impact over the past decades.

As the ESG industry grapples with the complexities of systemic discrimination and bias in the world’s largest and most influential companies, the path forward lies in a flexible approach to making sense of corporate disclosures across an evolving set of racial justice actions and indicators. Fundamentally, what is important is building rules-based, objective systems with the dynamism to adapt to new data as their comparability matures.

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OpenInvest is a Registered Investment Adviser and Public Benefit Corporation leveraging technology to provide a next-generation impact investing solution. Our easy and elegant Separately Managed Account platform seamlessly creates low-cost investment portfolios tailored to the causes clients cherish most, while tracking market indices. OpenInvest then delivers in-depth impact reporting, dynamic divest-invest activity, easy shareholder engagement, and more.

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