Ellevest

Magazine

A New Way to Invest for Racial Justice

By Sylvia Kwan

As the national movement to dismantle systemic racism grows more urgent and forceful, we’ve been taking a look at many aspects of our business practices and policies. One area we’re revisiting is our investment strategies.

Many of our Private Wealth clients have told us you want to know whether your 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 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 looked at 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 — they affect all of us, but they affect 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.

Today, we’re thrilled to announce that we’ve expanded the Ellevest Intentional Impact portfolios to include new ways of supporting all people of color, and supporting Black lives in particular.

An expanded lens of racial justice

We know that we can’t fully support women’s equality without also being anti-racist. So we’ve widened our lens 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.

As we began to widen our lens, it became clear that many of the issues that harm women also harm Black, Latinx, and Indigenous people, as well as other people of color. For example, while we originally chose firearms as a focus area 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.**

Another example is the environment. We were already focusing on 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 was exacerbated by systemic racism.

We’ve also added new criteria. 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 had no exposure in our Ellevest Intentional Impact Portfolios to US private prison companies, we began to think about the rest of the supply chain. The new Intentional Impact portfolios are reviewed for investment exposure to private prisons themselves. They’re also reviewed for exposure to companies that meet our criteria for having predatory practices within the private prison “ecosystem” through goods and services like transport, logistics, telecommunications, and catering.***

Another new focus is remuneration. Gaps between the highest-paid executives and the average worker salary are directly associated with a country’s income inequality, which in turn exacerbates wealth inequality. This inequality is widest for Black and Latinx Americans, and it’s 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. The Ellevest Intentional Impact portfolios now look at the companies’ compensation ratio and policies, and eliminate those that don’t meet our criteria.

How it works

At Ellevest, we’re always looking to improve what we can offer our clients, and social justice is a priority. 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 updated them, we worked hard to minimize the tracking error to the market benchmark — and in fact, it’s almost exactly the same with this update.****

We also know that it can be hard to see where you might be missing an opportunity for social justice in your current investment portfolio. We believe everyone should be able to access this information, so we share it with anyone who is interested.

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, along with some specific reasons for exclusion. 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. After you’ve moved 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 falls out of alignment, 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.

Right now, we are working to source an alternative investment that will direct capital to private businesses in the US that are owned or led by women and people of color, including Black entrepreneurs. Getting more capital directly into the hands of Black-owned businesses and supporting leaders of color 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 time.


Disclosures

Ellevest Intentional Impact portfolios are separately managed equity accounts that are sub-advised by Ethic, Inc., an SEC-registered investment advisor. As sub-advisor, Ethic constructs and manages portfolios of individual stock positions benchmarked to an underlying index and customized to specific values criteria. The sub-advisor seeks to track the performance of 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.

© 2020 Ellevest, Inc. All Rights Reserved.

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

**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.

Ellevest Intentional Impact portfolios are 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, Water, Working Conditions, and Workplace Diversity (including gender metrics on low employee representation, low management representation, and low board representation).

The primary benefit of 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.

Some of the key risks for investing in an 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 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-Advisor Risk
The success of an account’s investment through sub-advisors is subject to a variety of risks, including those related to the quality of the management of the sub-advisor and the ability of such management to develop and maintain a successful business enterprise, and the ability of the sub-advisor 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.

Ellevest Intentional Impact portfolios give clients access to broad equity market exposure. The target tracking error for the portfolios is under 1.50%. Reporting on 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-advisor.

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

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