As the Black Lives Matter movement and other campaigns pushing for racial justice gain traction, to ensure clients’ investments are backing organizations that truly strive for equality, ESG funds must first be able to clearly distinguish unsubstantiated claims from companies enacting real systemic change.
In previous blog posts, we’ve discussed the practices of greenwashing before, in which companies misrepresent their positive environmental impact. However, a similar but different scenario regarding racial equity is more pressing than ever before. As the Black Lives Matter movement and other campaigns pushing for racial justice gain traction, to ensure clients’ investments are backing organizations that truly strive for equality, ESG funds must first be able to clearly distinguish unsubstantiated claims from companies enacting real systemic change.
ESG, or environmental, social and corporate governance, is a popular metric for socially conscious investors to measure a company’s impact on the environment, as well as its employees, business partners, and surrounding communities, and examining its leadership and those tasked with running the organization. ESG is an example of the type of sustainability-minded investment practices that have recently been gaining traction. In 2019, nearly $21 billion of new money was pulled into “sustainable” funds, nearly four times the $5.5 billion calendar-year record set in 2018. In addition, nearly 74% of global investors say they “plan to increase their allocation to ESG ETFs over the next year,”  according to Brown Brothers Harriman’s 2020 Global ETF Investor Survey, and ESG ETFs also “earned the top ranking among global ETF investors as the strategy they want to see more of in the market.”
However, as heartening as it is to see so many people embrace socially responsible investing, there’s still some confusion as to the definition of ESG, and funds can misrepresent their sustainability. The Investor-as-Owner Subcommittee of the SEC Investor Advisory Committee recently acknowledged this problem, saying, “investors largely rely on third party ESG data providers, which may not always be reliable, consistent, or necessarily material” and that “there is a lack of consistent, comparable, material information in the marketplace,” in a recommendation released in May.
At this time, while there are many ESG funds available, few focus specifically on racism and racial equality. However, that may be changing. In 2018 the NAACP announced the launch of the NAACP Minority Empowerment Exchange Traded Fund, which “scores and ranks companies on the S&P 500 based on their commitment to diversity and inclusiveness” and was “created using NAACP’s corporate scorecard model to hold corporations accountable through a market-driven approach.” Investment firms and foundations of all sizes have been picking up this thread; OpenInvest introduced an index fund for racial justice in June 2019, as are many other smaller foundations such as the Kellogg Foundation, the Ford Foundation, and the Detorit Entrepreneurs of Color Fund, to name a few. The current societal emphasis on racial justice and long-term solutions may predict a rise in socially conscious investing focused on anti-racism.
Offering ESG funds specifically targeted towards racial justice may be a pertinent move widely embraced by activist investors. Going back to the previously mentioned inconsistencies in determining what “counts” as an ESG fund, it’s even more difficult to quantify what qualifies as adequate measure of racial justice, and where the threshold should be. That said, there are a few steps that plan sponsors can take to offer more transparency and insight into the companies included in their ESG funds regarding anti-racism measures. A summary that details executive leadership and the Board of Directors, public statements the company has made on the issues around which the funds are based, as well as including notes on relevant business practices, track record, and why these specific companies were included in the funds can help reassure investors that they are putting their money toward companies that truly further their goals. Additionally, offering a wide variety of ESG choices allows investors to weigh their options. Being presented with a multitude of choices that prioritize different focuses can help investors make decisions and prioritize their social and financial goals.
With the current push for racial equality we are now experiencing, every sector of the economy must not only respond to this call to action, but also follow through on the promises of creating meaningful change within their companies that they have made. “Words are great, but they’re no longer enough…thank you for your message of support, now let me see a picture of your executive leadership team and Board of Directors,” says organizational psychologist Dr. Ella Washington of Georgetown University. ESG and other socially-conscious investment opportunities are only gaining traction, and with a little work it’s possible to both fight racism and make investments as financially sound as they are morally just.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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