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8 steps to creating racial justice portfolios

Originally Published By Investment News

Interest in investing for equity and inclusion is growing, and yet most clients don't know where to start.

2020 has seen an unraveling of our social contracts. As we look to rebuild our economy and reweave our society, financial advisers have a powerful role to play. Client interest in investing for equity and inclusion is rising, and yet most investors don’t know where to start. Below are eight ways to help clients create portfolios that promote racial justice.

1. Work with diverse asset managers. When choosing asset managers and investment products, seek diversity. Currently, firms owned by women and minorities combined manage just 1.3% of the assets in the $70 trillion asset management industry.

2. Look at the leadership of publicly traded companies. Count the people of color in a company’s leadership and steer clients away from those with all-white boards and executive suites. Accumulating research illustrates the benefits of inclusive practices for companies as well as shareholders, so favoring companies with diverse leadership is not only the right thing to do for racial justice, but also a smart financial move.

3. Invest in startups led by people of color. Even impact investors may have unconscious biases or narrow screens that exclude people of color, so when working with clients on equity investments, actively seek out diverse entrepreneurs. You can find Black- and women-owned startups at Investibule and Crowd Source Main Street.

4. Invest in businesses that solve problems for — and with — communities of color. If we’re going to transition to a just, sustainable and inclusive economy, we’ll need to direct investment dollars to companies that are actively innovating on behalf of people of color. Look for solutions-focused companies that work with the communities they serve to solve systemic problems, such as providers of renewable energy, affordable housing and preventive health care. Similarly, when selecting municipal bonds, choose projects that benefit communities of color or improve the lives of historically disadvantaged populations.

5. Evaluate employment policies and practices. Select companies based on their hiring practices, sexual harassment policies, diversity and inclusion actions, family leave policies, childcare benefits and other programs that promote equitable workplaces. Recommend investing only in companies that pay a living wage to every employee.

6. Red-flag companies that cause injustice. Many portfolios include companies that cause harm to communities of color, such as private prisons, firearms manufacturers and companies that pay below living wages (for specific examples, see Robasciotti & Philipson’s racial justice exclusion list). Develop a plan to sell harmful holdings and reinvest in solutions-focused companies.

7. Support shareholder activism. Use your platform to support shareholder advocacy campaigns on racial justice, work with activist fund managers who demand that their portfolio companies do better in this area, and help clients vote proxy statements along racial justice lines. The investor voice is more powerful than many realize.

8. Develop an investment policy statement for racial equity investing. An investment policy statement spells out the goals and objectives for a portfolio, providing direction and parameters for investment managers. Many institutions are articulating values in addition to asset allocation goals within their IPS, and advisers can help all clients do the same by offering a customizable model IPS.

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