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Investors Should Avoid 6 Pitfalls to Champion Racial Equity

Achieving racial and economic equity is a defining opportunity of our time. Globally, widening inequality and racial and ethnic discrimination threaten peace, social cohesion, and economic stability. Along with civil society and government, investors have a powerful and essential role to play by redesigning investment policies and practices to center equitable outcomes.

The time for investors to center equity has never been more urgent in America, with nearly 100 million people in America living in economic insecurity. This includes over 40% of people of color and nearly 25% of white people. People of color are also dramatically under-represented as decision makers in the financial industry: fund managers of color manage only 3.9% of mutual funds, 8.9% of hedge funds, and 1.2% of real estate assets under management (AUM) in the U.S. As we become a more racially diverse nation, we face, without a dramatic intervention, an economic future of increased instability and an increasingly fractured society.

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Pressed to take a hard look at their own practices and consider the roles they play in systemic economic inequities across our society, investors are taking note: a growing number are now taking steps to integrate racial equity into their investing strategies. In doing so, they aim to both a) close racial gaps within their own organizations, and b) to do so within the businesses and communities they invest in – a multifaceted approach that represents the highest level of professional practice for investors.

However, undoing racial inequities will happen neither quickly nor easily, and perhaps not at all, if we collectively continue to only count customers rather than looking upstream at the sources of inequity. Investors need clear, rigorous markers to help them focus on areas of weakness and find momentum in areas of growth.

As we become more racially diverse, we face, without a dramatic intervention, an economic future of increased instability and an increasingly fractured society.

In 2020-2022, PolicyLink, CapEQ, and the Global Impact Investing Network (GIIN) partnered to develop new racial equity metrics for the GIIN’s IRIS+ system, the generally accepted system for measuring and managing impact among investors. Throughout the development, we engaged over 180 stakeholders, two-thirds of whom identified as people of color. The new racial equity metrics amplify many calls to action that have come before it, providing actionable, clear guidance on integrating racial equity awareness and action in investment strategies, portfolio decisions, and evaluation of return on investment.

All investors aiming to advance racial equity will hit roadblocks. We outline below six common barriers we see every day. Investors can overcome these barriers by being aware of them, resourcing their organizations appropriately, and managing setbacks with organizational reflection and a willingness to try again.

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Three Common Pitfalls to Avoid for Investors Getting Started

Despite recognizing the need for more effective racial equity practices within their organizations and portfolios, many investors starting out on their racial equity and DEI journeys succumb to three common pitfalls:

  • Pitfall 1: Thinking that racial equity is solely about diverse representation. While addressing diversity in the workforce, decision-making, and in company leadership is an important piece of the puzzle, many investors beginning their work on racial equity assume incorrectly that diverse representation is a silver bullet for solving inequalities that run rife in financial markets. Addressing racial equity instead requires deep consideration of who has power in investment decision-making, what criteria and practices currently embed unintentional biases into assessments of investment risk, and whether the outcomes of those investments are advancing justice. These three components – power, risk, and justice – are critical for all investors aiming to drive toward racial equity.
  • Pitfall 2: Using impact management to claim victories, not guide growth. Achieving racial equity requires both diligent, intentional processes and consistent, rigorous evaluation of outcomes. Racial equity is often seen as both an emergent process and an outcome — investors cannot have one without the other. By using thoughtful, regularly assessed indicators of progress toward racial equity practice milestones, investors can both see their own growth and course correct quickly when needed.
  • Pitfall 3: Aiming to solve for equity in one big push. Growing demand to advance racial equity, internally and externally, may create a sense of urgency to act quickly and score some wins. However, gaining internal alignment and developing long-term strategies are more likely to create lasting impact. Integrating racial equity considerations into investment strategies requires persistence as well as a deep commitment, both at an organizational and personal level. Existing racial inequities are the result of long-standing systemic decisions that have played out over centuries. Undoing those inequities will not happen easily or quickly, so investors must begin this work as soon as possible and invest for the long-term.

Investors have both a unique opportunity and a fundamental responsibility to champion racial equity within their organizations and portfolios – the future of our economy depends on it.

Three Next-Level Pitfalls to Avoid for Investors Continuing the Work

Even those investors who are more advanced in their racial equity journeys – perhaps they have already established a common vision of what a more equitable future could look like within the organization and having agreed on goals and indicators to track progress – are often caught by next-level challenges as they progress:

  • Pitfall 4: Fear of making mistakes. Investors and business leaders fail sometimes. Making mistakes is a part of investing and should also be expected along the equity journey. The key is to prepare for mistakes and ensure the organization has the leadership capacity to persevere through them. We see a growing number of investors and business leaders with a deep awareness of how the financial industry perpetuates racial and economic inequities and yet they still hold back from bolder action, in part out of a fear of making mistakes. The transformation we need in our economy to achieve racial equity will require nothing less than radically bold, cutting-edge leadership.
  • Pitfall 5: Resistance to shifting power. A fundamental component of achieving racial equity is ensuring that historically excluded groups are proportionately represented in positions of power and leadership, and that those most impacted by injustice are decision-makers in the design and implementation of equitable solutions. That shift requires rethinking and expanding who decides, who owns, who leads and who governs, and doing the work to ensure historically excluded groups are represented fairly and meaningfully.
  • Pitfall 6: Failure to build trust through transparency. After decades of lackluster results on DEI in the private sector, trust is understandably broken among workers and communities of color. Rebuilding trust will require multiple interventions, one of which is much greater transparency in organizational practices and where organizations are on the journey. Transparency does not require perfection or change overnight, rather it requires a willingness to hold yourself accountable to continuous improvement and ultimately achieving equitable outcomes.

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Way Forward

Investors have both a unique opportunity and a fundamental responsibility to champion racial equity within their organizations and portfolios – the future of our economy depends on it. To do so, investors must not only advance justice and equitable outcomes through their portfolios, but they must also address disparities in decision-making power and biases embedded in standard processes for assessing risk of potential investments. Adopting comprehensive and thoughtful indicators for impact management can help investors understand the risks of inequities, plan their path forward, measure progress over time, and better determine how and when to deploy resources in service of these goals. Now is the time for investors to adopt new norms for the long-term prioritization of racial equity and economic justice in all investing – without new norms we will never achieve an equitable future where all people can participate, prosper, and reach their full potential.

This essay is part of the “Why IM” thought leadership series — a set of perspectives and calls to action to mainstream the adoption of Impact Management. The series is an initiative of Impacting Together, a cross-sector network of practitioners aiming to break down silos across sectors and practice areas to share tools, solutions, and frameworks that can advance deep, durable impact. Previous articles in the series:

  1. In It Together: A Blueprint to Move from Climate Activism to Global Environmental Norms
  2. Why Impact Management Matters
Mahlet Getachew, Managing Director of Corporate Racial Equity at PolicyLink, works to ignite the racial equity movement more broadly and deeply within corporate America. She comes to PolicyLink with extensive experience in the private sector advising public and private corporations across various industries as external legal counsel and in-house counsel.
Tynesia Boyea-Robinson, President and CEO of CapEQTM, has been religiously leading and writing about enterprises that “do well and do good” for over a decade. As President and CEO of CapEQTM she works with companies and investors to embed equitable impact in their daily practice.
Lissa Glasgo, Director, IRIS+/Impact Measurement & Management (IMM) at the GIIN, leads the IRIS+ standards on impact themes including DEI and supports the development of the GIIN’s impact performance benchmarks. She is grateful to have spent her career on IMM strategy/research for incredible organizations and people around the globe.

This article was produced in collaboration with the Magazine's Content Partners.

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