Racial Equity Focus Maximizes Impact Investing Opportunity, Study Says

Racial Equity Focus Maximizes Impact Investing Opportunity, Study Says

Impact investing strategies focused on racial equity offer the greatest potential for social problem solving and financial benefit, a report from investment firm Cambridge Associates suggests.

The report, Social Equity Investing: Fighting Institutional Wrongs (12 pages, PDF), examined eight core issue areas ripe for social equity investing (defined as investments to promote equal opportunity and access for all, regardless of background): gender equity, education, civil rights/civic practices, transportation, racial equity, affordable housing, financial inclusion, and health and wellness. Given the complex legacies of structural racism and the resulting racial disparities in all eight areas, the report argues, investing to advance racial equity presents a critical opportunity for institutional asset owners with social equity goals. And because communities of color represent the greatest potential for growth in terms of buying power, the financial and economic benefits of effectively addressing racial inequities are also great.

According to the report, strategies focused on racial equity can be divided into two areas — increasing capital access and allocation, which seeks to increase capital flows to communities of color and address the historic and continued capital gaps in those communities; and improving business lines and practices, which seeks to ensure that existing businesses, products/services, and policies are positively supporting communities of color. The report's authors suggest that capital access and allocation strategies might include focusing the search for investment managers on firms that are owned or led by people of color or investing in a venture strategy with a specific focus on racially and ethnically diverse entrepreneurs, while strategies that focus on business practices might include backing startups that create affordable and accessible financial tools.

"The discipline of racial equity investing is exciting and, we believe, of immense importance to society," said Erin Harkless, a senior investment director focused on mission-related investing at Cambridge Associates. "There has been continued demand from our clients — endowments, foundations, private clients, and pensions — to develop portfolios that address diversity and equity. We expect that the growing prominence and focus on these allocations will yield a more robust opportunity set — due both to new entrants and existing players pivoting to address racial equity via their investment portfolios. Already, we've seen more investment managers articulating strategies that have an impact on communities of color."