Magazine

A New Way to Invest for Racial Justice

By Sylvia Kwan

Since the demonstrations and protests that swept the country last summer, America has struggled in its fight to uproot systemic racism. But the past year has offered us the rare opportunity to not only reimagine our existing business practices and policies, but also redouble our efforts to continually revisit and revise our investment strategies.

Many of our Private Wealth Management clients have told us that they want to know whether their portfolios contain stocks of companies that are harmful to racial justice, like private prisons. Others want to know whether Ellevest is investing to help address racial and social inequities.


Investing with intention

In the fall of 2019, we launched the Ellevest Intentional Impact portfolios for our Private Wealth clients — a way to redirect your investment money away from companies with products, policies, and practices that may harm women, and invest in companies that meet our criteria for doing the right things by women instead.

This was something brand-new. While other investment advisors offered “gender lens” options that focused on workplace equality, we wanted to account for the greater risk and bias women face in their everyday lives. When companies have harmful business practices around things like fraud, poor working conditions, and pollution, it affects all of us — but it affects women more.

After much research, we drilled down into 12 original focus areas, each one correlated to disproportionate harm to women. Within the Intentional Impact portfolios, we were able to evaluate companies’ products, policies, and practices against these criteria.

Since launching that strategy, we’ve expanded our Intentional Impact portfolios to include new ways of supporting Black lives — as well as people of color more broadly — twice.

An expanded lens of social justice...

We know that we can’t fully support women’s equality without also being anti-racist. So our lens expands past gender-specific data correlations to practices that have been shown to harm or exclude Black and brown people — and therefore Black and brown women.

Many of the issues that harm women are intersectionally harmful: they also impact Black, Latinx, and Indigenous people, as well as other people of color, who are not women. For example, while we originally chose to review portfolios for investment exposure to firearms because guns exacerbate domestic violence, it is also true that Black people are disproportionately victims of gun violence in the United States — they’re ten times more likely to be murdered with a gun — so we now also consider that data in filtering for exposure to firearms.

Another example is the environment. We were already focusing on investment exposure to things like greenhouse gases, water, and waste, because across the planet, 80% of people displaced by climate change are women. Environmental racism is also very real. Air pollution disproportionately affects Black, Latinx, and Indigenous communities, and exposure to it is linked to higher mortality rates from COVID-19 and clusters like “Cancer Alley” in Louisiana. There are racial and gender disparities in access to clean water globally and in the United States, as in Flint, Michigan, where the water crisis has been exacerbated by systemic racism.

We also added a few new criteria in our first expansion of the Intentional Impact portfolios. First, we took a deep dive into the data around private prisons. Despite representing just 32% of the US population, Black and Latinx Americans make up 56% of the nation’s prisoners. While we hadn't previously had any exposure in our Ellevest Intentional Impact Portfolios to US private prison companies specifically, we began to think about the rest of the supply chain. The Ellevest Intentional Impact portfolios are reviewed for investment exposure to private prisons themselves, just to be sure, but they’re also reviewed for exposure to companies that engage in predatory practices within the private prison “ecosystem” through goods and services like transport, logistics, telecommunications, and catering.

Another new focus was remuneration. The salary gap between the highest-paid executives and the average worker is directly associated with a country’s overall income inequality, which in turn exacerbates wealth inequality globally. This intracorporate pay gap is widest for Black and Latinx Americans, and the difference is overwhelming: The median Black family in the US has only about one-tenth the wealth of the median white family. And the racial wealth gap hits women hardest of all: The average Black woman owns one single penny for every dollar the average white man owns. We measure companies’ compensation ratios and policies when evaluating them for possible inclusion in the Ellevest Intentional Impact portfolios.

... that continues to shape how we combat complex inequality.

Because racial inequality is so deeply ingrained in the fabric of our society, racial justice will always be a complex, ever-evolving fight. For that reason, we continually review and reevaluate how our investment strategies impact that fight. Most recently, we’ve expanded our filtering criteria even further to include more screens to our existing focus areas, such as:

  • Exploitative Education: American for-profit colleges, which disproportionately target and enroll students of color, have been shown to engage in predatory debt practices, resulting in nearly half of their students defaulting on their loans. Going forward, we’ll be considering this data when evaluating for Exploitative Products.

  • Unhealthy Food and Beverage: Companies that market unhealthy foods and beverages (like fast food, soft drinks, etc.) are far more likely to advertise in Black and low-income communities, particularly to children. This data, too, will be added to our existing evaluations around Exploitative Products.

  • Financing of Fossil Fuel Operations: Latinx and Black Americans are far more vulnerable than white Americans to illnesses and death caused by climate-change-related conditions like increased temperatures and poor air quality. Major commercial and investment banks routinely bankroll practices that contribute to these conditions, including fossil fuel exploration, drilling, processing, and shipping. We’re adding a new filter for these types of institutions to our existing Racial Justice and Climate Change evaluations.

  • Cash Bail Lenders: Pretrial detainees — people who have not been convicted of a crime but are unable to post bail — make up two-thirds of the jail population and a quarter of the entire incarcerated population in the US. Black defendants are more likely to be subjected to the bail system, and pretrial detention is associated with worse economic outcomes and increased recidivism among people subjected to it. Cash bail companies are a major contributor to the American prison system’s disproportionate impact on people of color. This category will be added to our existing criteria filtering against Private Prisons and Border Detention.

How it works

At Ellevest, we’re always looking to improve how we serve our clients, and our relationship with social justice is a major part of that. But as fiduciaries, our investment strategy doesn’t change. We’re always here to help you achieve your goals through diversified investments designed to achieve market returns.

That means we built the Ellevest Intentional Impact portfolios with an investments-first approach. As we update them, we work hard to minimize the tracking error to the market benchmark — and in fact, it’s almost exactly the same with this update as it was before.

We also know that, when you're looking to update your current investment portfolio for social justice, it can be difficult to spot those opportunities at a glance. So it works like this: You send us statements from your current portfolio. We analyze your holdings and let you know which companies don’t align with our Intentional Impact values for gender equality and racial justice — and why we exclude them. If you’re interested, we’ll work with you to make a transition plan that balances your financial goals, tax considerations, and the impact you want to make. Speak with your Ellevest financial advisor if you’d like to learn more.

After you’ve transitioned to an Intentional Impact portfolio, we report back on your impact, so you can see the difference you’re making over time. We also monitor your investments, so that if a company stops meeting our standards, your portfolio will be adjusted.

We’re not done

Moving forward, we’re going to keep looking for new ways to broaden our view of impact investing to address systemic racism, such as seeking alternative investments that direct capital to private businesses in the US that are owned or led by women, people of color, and members of the LGBTQIA+ community. Getting more capital directly into the hands of these businesses and supporting underrepresented leaders will help grow those businesses, create jobs, and strengthen our economy.

Beyond the Private Wealth offering, we’re also doing the work of evaluating the mutual funds and exchange-traded funds (ETFs) we offer with our online investing platform for Ellevest members. So far, we haven’t found suitable replacements with racial justice mandates. But we’re committed to continuing the search — and to pressing fund companies to create them.

You may have heard us say it at Ellevest before: Money is power. Together, we can help create the change we want to see in our country, using the power of our capital to invest with intention. It’s been a long time coming.


Disclosures

The Ellevest Intentional Impact Portfolio is a separately managed equity account that is sub-advised by Ethic, Inc., a SEC-registered investment advisor. As sub-adviser, Ethic constructs and manages portfolios of individual stock positions benchmarked to an underlying index and customized to specific values criteria. The sub-adviser seeks to deliver equity market returns that track closely with a designated equity benchmark (domestic and / or international) while outperforming on impact across key sustainability criteria as defined by Ellevest and / or the client.

The minimum investment in Ellevest Intentional Impact Portfolio is $250,000. In addition to Ellevest’s advisory fee, the client will pay 0.30% of assets managed to the sub-advisor.

A firm reporting that more than 5% of their revenues are from firearm sales will be screened out. Note that not all companies report their revenues from gun sales, so we can’t guarantee that you will be fully divested from firearms.

The Ellevest Intentional Impact portfolios uses the divestment recommendations created by the American Friends Service Committee to identify and screen out companies for practices around the private prison ecosystem. Those recommendations are based on an assessment of three criteria: the salience of the human rights violation, the company's responsibility for the violation, and the company's responsiveness to stakeholders’ concerns about the violation.

The tracking error of Ellevest Intentional Impact Portfolios before the update, as of 7/8/20: 1.36%. Tracking error of the enhanced strategy: 1.37%. The tracking error relates how well a portfolio's performance aligns to the underlying benchmark performance.

© 2021 Ellevest, Inc. All Rights Reserved.

The Ellevest Intentional Impact Portfolio is a separately managed equity account that is sub-advised by Ethic, Inc., a SEC-registered investment advisor. As sub-adviser, Ethic constructs and manages portfolios of individual stock positions benchmarked to an underlying index and customized to specific values criteria. The sub-adviser seeks to deliver equity market returns that track closely with a designated equity benchmark (domestic and / or international) while outperforming on impact across key sustainability criteria as defined by Ellevest and / or the client.

The Ellevest Intentional Impact Portfolio is expected to comprise around 300 US-listed equities (including ADRs as applicable) chosen through an outsourced multi-factor optimization software and sustainability data science developed by Ethic to minimize tracking error.

The sustainability criteria is based on risks in the following categories: Ethics and Fraud, Firearms, Excessive Remuneration, Exploitative Products, Greenhouse Gas Emissions, Human Rights and Community (including private prisons), Labor Relations, Product Quality and Safety, War, Waste, Working Conditions and Workplace Diversity (including gender metrics on low employee representation, low management representation , and low board representation.

The Ellevest Intentional Impact portfolios uses the divestment recommendations created by the American Friends Service Committee to identify and screen out companies for practices around the private prison ecosystem. Those recommendations are based on an assessment of three criteria: the salience of the human rights violation, the company's responsibility for the violation, and the company's responsiveness to stakeholders’ concerns about the violation.

A firm reporting that more than 5% of their revenues are from firearm sales will be screened out. Note that not all companies report their revenues from gun sales, so we can’t guarantee that you will be fully divested from firearms.

The primary benefit of the Ellevest Intentional Impact Portfolio is that it provides broad market exposure with a goal of keeping average tracking error low over the long term, less than 1.50%, while divesting from companies that do not meet the strategy’s sustainability parameters. The tracking error may be meaningfully higher if the equity allocation is transitioned over time due to tax or other considerations or if the customized sustainability criteria specified by the client overly restricts the investable universe of securities.

Some of the key risks for investing in the Ellevest Intentional Impact Portfolio include:

Market Risk

As with all publicly traded securities, the SMA is exposed to market risk, the risk of losses arising from fluctuations in market prices caused by factors independent of a security’s particular underlying circumstances.

Active Risk

Although the SMA is constructed to minimize tracking error relative to its benchmark, there is no assurance that the strategy will generate market returns within the estimated tracking error. Because the SMA is designed to capture investment returns associated with gender and racial diversity, and high environmental and governance standards, the SMA may exclude, overweight, or underweight individual companies and/or sectors of the market. As a result, the SMA will not fully participate in the market returns of a general investment strategy. The SMA may over or under perform a general market strategy.

Sub-Adviser Risk

The success of an account’s investment through sub-advisers is subject to a variety of risks, including those related to the quality of the management of the sub-adviser and the ability of such management to develop and maintain a successful business enterprise, and the ability of the sub-adviser to successfully execute, operate, and manage the intended strategy at or below the target tracking error.

Business Risk

The fund’s strategy relies on key personnel, their expertise, relationships and networks. A loss of one or more key personnel may adversely impact the strategy.

The Ellevest Intentional Impact Portfolios give clients access to broad equity market exposure. The target tracking error for the Portfolios is currently under 1.50%. Reporting on the Ellevest Intentional Impact Portfolios will be provided to clients no less than annually.

The minimum investment in Ellevest Intentional Impact Portfolio is $250,000. In addition to Ellevest’s advisory fee, the client will pay 0.30% of assets managed to the Sub-adviser. All opinions and views expressed by Ellevest are current as of the date of this writing, for informational purposes only, and do not constitute or imply an endorsement of any third party’s products or services.

All opinions and views expressed by Ellevest are current as of the date of this writing, for informational purposes only, and do not constitute or imply an endorsement of any third party’s products or services.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.

Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investing entails risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.

Sylvia Kwan

Dr. Sylvia Kwan is the Chief Investment Officer of Ellevest. She researches and oversees Ellevest portfolios and develops the algorithms behind Ellevest’s investment recommendations.