Investing alone not enough to tackle racial inequities, paper argues

To tackle long-standing racial inequities, institutional investors must go further than allocating money to minority-owned asset managers or even directly investing in companies that seek to benefit communities of color, a new research paper says.

Investors will have to hold a magnifying glass to their own investment policies and priorities, diversity and inclusion practices, and assess whether they are equipped to address inequities in the communities in which they aim to invest, research from Cambridge Associates LLC said.

"For a challenge like systemic racism and universal bias that is in society, you have to take a systematic approach," said Liqian Ma, Boston-based head of impact investing research at Cambridge Associates.

"It can't be, 'let's make an allocation to a diverse manager.' It has to be a change in mindset. It has to be a reframing of the opportunity set and really unlearning a lot of the biases institutional investors have when dealing with (money) managers," Mr. Ma added.

In the research paper this month, Cambridge Associates challenged investors to take a three-pronged approach in their investment portfolios and investment practices to target racial inequities.

First, institutions should make clear the purpose, priorities and principles of their investments aimed at addressing racial inequity, and make racial equity an investment priority and codify it in the investment policy, the report said. Secondly, investors should start allocating capital to racial-equity investments.

Finally, investors should put racial equity at the center of the investment selection process by looking at their own culture and diversity policies, determining whether they have the "cultural competency" to address the needs of communities of color and if these needs are considered in the investment decision-making process, the report said.

One byproduct of systematic racism already staring the investment management industry in the face is the racial wealth gap and its impact on retirement savings.

Some 80% of white non-retirees, polled in a recent Federal Reserve Board survey, said they had "any retirement savings," compared with 64% of Black non-retirees and 61% of Hispanic non-retirees. The May report also found that while 43% of white non-retirees felt their retirement savings were "on track," that was only the case for 29% of Black and 22% of Hispanic individuals, the report said.

In 2016, a Fed survey of consumer finances revealed specifics about the retirement savings disparities between white and non-white families. The median value of retirement accounts for white families in 2016 was $77,000, while Black families had $24,600 in retirement accounts and Hispanic families, $22,600.

In order to tackle disparities in retirement savings, the industry must first contend with the racial wealth gap, sources said.

"You can't invest what you don't have," said Nela Richardson, a St. Louis-based economist who serves as a principal and investment strategist at Edward D. Jones & Co.

People with lower income tend to "spend more out of their income," while those with higher income tend to invest those assets, Ms. Richardson said. Systemic racism has also fueled disparities in home ownership and entrepreneurship, which have traditionally been the biggest drivers of wealth creation in the U.S., she added.

"The gap in homeownership is wider (now) than it was when housing discrimination was legal," prior to the passage of the 1968 Fair Housing Act, Ms. Richardson said, citing research from Urban Institute, a Washington-based non-profit research organization.

In 2017, the Black homeownership rate was the lowest among racial and ethnic groups at 41.8% — its lowest level in 50 years — while the Hispanic homeownership rate was 47.3% and white homeownership was 71.9%, the Urban Institute report shows. Furthermore, the COVID-19 pandemic has disproportionately resulted in the shuttering of many Black-owned businesses, Ms. Richardson said.

A June report by the National Bureau of Economic Research found that the number of active business owners in the U.S. dropped by 3.3 million, or 22%, between February and April. The Black community was hit the hardest by COVID-19, however, seeing a 41% drop in active business owners, while the number of business owners identifying as Latino dropped by 32% and Asian business owners fell by 26%. In comparison, the number of white business owners dropped by 17% during the months.

Left unchecked, the racial wealth gap will not only continue to adversely impact the retirement savings of communities of color, but drag on the U.S. economy, according to recent research. If the racial wealth gap were closed, U.S. GDP could be an estimated 4% to 6% higher by 2028, according to a McKinsey & Co. report published in August.

"Other than its obvious negative impact on human development for Black individuals and communities, the racial wealth gap also constrains the U.S. economy as a whole," the report said. "It is estimated that its dampening effect on consumption and investment will cost the U.S. economy between $1 trillion and $1.5 trillion between 2019 and 2028."

Regarding the retirement savings gap, Kelli Keough, managing director, head of digital and client solutions for U.S. wealth management, J.P. Morgan Chase & Co., New York, said that since "the wealth gap definitely impacts the retirement savings gap ... the important place for us to start is with the wealth gap overall."

"Educating about the benefits of using workplace retirement plans or other plans with tax benefits, and promoting the participation in matching contributions are key for effectively narrowing the wealth gap," Ms. Keough said.

In 2018, the median take-home income for Black families was $34,011, and for Hispanic families $35,666, while white families had $47,908, an April report by J.P. Morgan Chase & Co. Institute said. This translates to the median Black family earning just 71 cents and the median Hispanic family earning 74 cents for every dollar the median white family earned, the report said.

In July 2019, Sen. Cory Booker, D-N.J., and Rep. Ayanna Pressley, D-Mass., reintroduced legislation aimed at closing the racial wealth gap by making "baby bonds" available to children in the U.S. Under the bill, every child would have an interest-bearing account of $1,000 at birth that would receive additional deposits each year based on family income. Account holders would be able to access the funds at age 18 for purposes such as buying a home or paying for educational expenses.

On July 22, during a virtual forum hosted by BlackRock Inc., New York, Mr. Booker revisited the role that baby bonds could play in wealth equality, as they are "about long-term wealth creation and bridging the gap over a period of time."

Mr. Booker also advocated expanding the earned income tax credit as well as the child tax credit to tackle poverty in the Black community.

Shundrawn A. Thomas, president of Northern Trust Asset Management, Chicago, said that one of the first things companies can do to address the racial wealth gap is to examine pay equity at their organization and address any existing gaps.

In addition, companies can look at ways to address college indebtedness among racial and ethnic minorities.

"One of the biggest contributors to the wealth gap for ethnic minorities, particularly for Black and Latino communities, is the amount of college debt that they have," and that much of their early work years are spent paying student loan debt off, Mr. Thomas said. "Over the last decade and a half or so, companies have pulled away from (educational assistance) programs that help people pay off debt."

Some employers in recent years have added specific programs to help employees pay off student debt as part of their retirement plans and bills to support such efforts have been introduced in Congress.

For companies in the investment industry, employers can not only offer retirement savings matching programs, but "make some of the investment products and solutions that we have expertise in available to our employee base," Mr. Thomas said.

For him, equity ownership, through investment in stocks as well as entrepreneurship, is another major key to tackling wealth disparities.

"If you really want to increase wealth in communities of color, you need to increase equity ownership," he added.

With that said, companies and investors must figure out "direct ways we can invest in, with, and alongside minority-owned business," Mr. Thomas said.