What is racial justice investing & why should you consider it?

The short version:

• Racial Justice Investing focuses on investments in companies that actively support racial justice for Black, Indigenous and People of Colour (BIPOC) business leaders and communities.
• Investors have a wide range of options to invest in BIPOC communities, including ETFs and directly investing in BIPOC-owned businesses.
• To find out which companies are truly racial justice-focused, you can research which companies have signed on to public racial equality pledges and sift through Fortune 500s Diversity and Inclusion list.
• In addition to encouraging BIPOC-inclusive workplace policies, racial justice investing can help spotlight champion larger societal issues like prison reform, police reform, and gun control.

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What is racial justice investing?

Racial justice investing is a method of socially responsible investing (SRI) that focuses on investments in companies who actively support racial justice for Black, Indigenous and people of color (BIPOC) leaders and communities.

In the S&P 500, only a handful of companies are led by Black, Asian, or Latinx/Hispanic CEOs or upper management. Racial justice investing focuses on the companies that are led by underrepresented communities, in an effort to create more diversity in the investing world.

Investors can take an active role by choosing and investing in individual companies themselves, or working with an advisor or robo advisor to put together a well-rounded portfolio with racial justice in mind. Whichever investing method you go with, here’s what you need to know about racial justice investing.

Public pledges

Some companies have taken public pledges to combat racism and advance racial equity. These pledged came about in response to police brutality protests, specifically after the murder of George Floyd. Companies wanted to pledge their support for the Black community and other communities of color. Here are three common pledges that companies can sign on to:

• 2020 Belonging Pledge – A Commitment to Advance Racial Equity
• Racial Justice Investing’s Investor Statement of Solidarity to Address Systemic Racism and Call to Action
• Responsible Asset Allocator Initiative at New America’s Asset Allocator Racial Equity Pledge

The Belonging Pledge alone has 97 companies who have signed on, making up almost $2 trillion in assets. The Solidarity Investor Statement has 210 investors, while the Asset Allocator Initiative is still in the works.

Impact investing

Impact investing is a subset of SRI, but it focuses on supporting companies that are directly and actively trying to impact society for the good. Racial impact investing narrows down the scope even further, focusing on investment options that are taking an active role in furthering racial justice and equality.

Direct indexing

Direct indexing is another method of racial justice investing. According to Blaine Theiderman, Colorado-based MBA and CFP, direct investing is a strategy used by some investment managers to have an index built for their clients.

“The largest benefit of direct Indexing is the ability to customize what kinds of companies you would like to invest in using individual stocks,” he says.

You can choose individual stocks that only support companies who have taken public pledges or who have inclusive policies in place.

What types of issues are addressed in racial justice investing?

Racial justice investing covers a variety of issues that affect BIPOC communities.

Racial equality in management and board

In the S&P 500, only a handful of companies are led by Black, Asian, or Latinx/Hispanic CEOs or upper management. Racial justice investing focuses on the companies that are led by underrepresented communities, in an effort to create more diversity in the investing world, which has long been dominated by mostly white men.

Gun control

Gun violence disproportionately affects communities of color, especially Black and Hispanic communities. There are companies that are taking a stand on gun control, and have limited their support for gun manufacturers.

Bank of America, for example, has completely stopped making loans to gun manufacturers that make military-style guns for civilians. Amalgamated Bank is another financial institution that has taken a hard stance on gun violence in our country. They don’t lend to any gun manufacturer or sellers.

Prison reform

The private prison system has a history of harming communities of color, especially Black Americans, at an alarmingly high rate. That's why some investors choose to divest from companies that support the prison-industrial complex.

You may be unknowingly investing in companies that fund private prisons through mutual funds or ETFs. To make sure none of your investments support prisons, you can use Prison Free Funds, which searches through funds and ETFs in your personal portfolio or retirement account.

Police reform

Many of the public pledges companies signed were created in direct response to the killings of unarmed Black men and women by police. While there are quite a few companies who signed these pledges, there are definitely companies who support police reform more openly than others.

For example, AT&T has long supported police reform, going all the way back to the 1960s. Supporting companies like AT&T with business and direct investing (AT&T is included in hundreds of ETFs), can help them continue their fight for racial equality.

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How to participate in racial justice investing

Here are some examples.While the options for racial justice investing are relatively limited, investors still have a range of choice. According to Christopher Sioco of Parachor Consulting, when it comes to racial justice investing, investors still have a lot of big- and small-scale options. That’s because racial justice investing is actually a very broad term with many investing options for younger and more experienced investors alike.

Invest in BIPOC-owned or led companies

You can directly support BIPOC-owned businesses, which can go a long way in helping the business community become a more equal and diverse place to work.

“Supporting Black-owned businesses is one step toward the growth and development of our society.”

“Supporting Black-owned businesses is one step toward the growth and development of our society,” says Sioco. “Hence, investors should grab this opportunity of supporting the businesses and help them spread their wings. This will give them additional benefits and a chance to morally support their community.”

Overall, investing in BIPOC-owned businesses can only help the economy and investing world grow and flourish.

Design your portfolio around the right companies

Fortune.com releases a yearly list of companies that perform particularly well when it comes to inclusivity and racial justice. Here are their top 20:

• Microsoft
• Centene
• Target
• Gap
• Biogen
• Intel
• Verizon Communications
• Allstate
• PVH
• Bank of America
• Amazon.com
• Nike
• Wells Fargo
• Visa
• Bank of New York Mellon
• Progressive
• Citigroup
• Anthem
• Walgreens Boots Alliance
• Walmart

Before investing in a company or supporting their products, do your research. Companies who are actively combating racism aren’t afraid to say so.

For example, Alphabet (Google’s parent company) has donated $6 million towards criminal justice reform. JP Morgan Chase has made a $30 billion racial equity pledge. The financial services company has also opened more branches in predominantly Black and Latinx neighborhoods to make loans and mortgages more accessible to these communities.

Invest in the impact shares NAACP minority empowerment ETF

There’s really only one ETF that specifically focuses on racial justice. The NAACP Minority Empowerment ETF, which was built to offer exposure to companies that have demonstrated strong diversity policies. It’s also a nonprofit ETF that donates all fees you pay to the NAACP.

When investing in any SRI ETF, don't forget to check under the hood to make sure that their holdings truly match your values. For example, included in the top 10 holdings of the NAACP Minority Empowerment ETF is Amazon, which has been accused by some employees of reflecting a “systemic pattern of racial bias.” While this may not pose a red flag for every investor, it's important to understand where your personal line is drawn when it come to investing in your values.

ETFs can give you access to a wide range of companies, automatically keeping your portfolio diverse. Overall, the NAACP Minority Empowerment ETF has seen a positive trend upwards, signaling that racial equality is a growing social issue for investors.

More: Learn more about ETF investing here

Utilize robo advisors

Many robo advisors have hopped on board with SRI investing, with a few even focusing specifically on racial justice investing. Ellevest — an investing company designed by women, for women — supports all people of color, with a specific dedication to those who identify as women.

Ellevest has divested from companies who support the firearm industry or the private prison system in any way. They also focus on environmental options that support, rather than harm communities of color.

Why investors should consider racial justice investing

Participating in racial justice investing is a way to help empower traditionally underserved communities. Supporting businesses that continually improve their policies to create a more diverse and accepting society sets a higher standard for the larger corporate landscape.

Racial justice investing, in many ways, forces businesses to address unfair work policies and make active changes that will give employees of color an equally accepting workplace to be a part of.

The bottom line

Racial justice investing is a way for all investors to help promote a more diverse, equal, and just world.

Start by simply taking a look at your portfolio. Find out if any of the companies you're investing in are affiliated with corporations or practices that negatively affect communities of color.

If some are, you may want to consider divesting yourself of those holdings. Then you can begin to stack your portfolio instead with companies that truly care about, and are fighting for, racial injustice.

Learn more about SRI Investing:

• LGBTQ+ Friendly Investments: What They Are & How to Find Them
• How to Get Started With ESG Investing
• What's the Difference Between Ethical and Sustainable Investing?