Ellevest

Magazine

A Hard Look at Investing and Systemic Racism

By Sylvia Kwan

Over the past few weeks, as the national conversation about dismantling systemic racism and a culture of white supremacy has grown more urgent and forceful, we’ve been asked a number of questions about our investment policy.

Many of you want to know whether our investing portfolios contain stocks of companies that are harmful to racial justice, like private prisons. Others want to know our overall policies on diversity and inclusion when choosing investments, and whether Ellevest is investing to help address racial and social inequities.

First, thank you for the emails, the thoughtful questions, and for sharing your perspectives on these critically important issues that have sparked a national movement.

Without economic equality, we can’t achieve social justice

Right now, we’re researching, learning, and considering how we can improve our investment portfolios. There’s a lot to think through — starting with a hard look at wealth inequality in the United States.

The COVID-19 pandemic has painfully exposed the economic inequality that is disproportionately hurting Black and Latinx people. The unemployment rates in May speak for themselves: 17.6% for Latinx people, 16.8% for Black people, and 12.4% for white people. The number of Black-owned businesses in the US is down 41% from February to April due to the pandemic’s shutdown.

On average, Black Americans earn 75.6 cents for every dollar of white American wages. For Black women, it’s 62 cents, and for Latinx women, it’s 54 cents for every dollar a white man earns. In 2018, 72% of white households owned homes, compared to only 41% of Black households and 47.5% of Latinx households.

Not surprisingly, stock ownership is also predominantly white. Sixty percent of white US households hold stocks, which is double that of Black US households. Sixty percent of white families also have at least one retirement account, while only 34% percent of Black families do.

All of that adds up to a staggering racial wealth gap. The median Black family in the US has 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 data doesn’t lie. Lower employment, lower earnings on lower employment, lower savings and investing on lower earnings on lower employment: You don’t need to be a math expert to see how this untenable path compounds and leads to economic insecurity and overwhelming inequality for Black people, Latinx people, and other families of color.

We have often said: Money is power. We were typically talking about this along the lines of gender, but economic equality is just as much of a prerequisite for achieving racial equality. When BIPOC people (short for Black, Indigenous, and people of color) have more money, our economy can be stronger and more resilient. That’s good for everyone.

How can we accomplish this? From an investing perspective, we can intentionally direct our money toward investments we believe will work toward dismantling racial economic inequality. That could mean:

  • Investing in companies that have hiring mandates and practices that benefit BIPOC people.

  • Investing in companies that publish data on their racial pay gaps and are working to close them.

  • Investing to help fund more small businesses owned or controlled by BIPOC people.

  • Making investing accessible to people of all backgrounds and means.

  • Demanding more investing options with a racial equity lens.

Private prison holdings in Ellevest portfolios

In Ellevest’s online investing platform, we use publicly traded mutual funds and exchange-traded funds (ETFs) to build our portfolios, rather than individual stocks (here’s why). That means we can’t screen out individual securities held within them, like private prison companies. While we can control the funds we buy and sell in our investing portfolios, we can’t control the specific stocks those funds buy and sell.

We currently use four exchange-traded funds (ETFs) that hold positions in US private prisons.* They’re listed below, along with the percentage of each currently invested in US private prisons:

  • Vanguard Total Stock Market ETF (VTI): 0.02%

  • Vanguard Small Cap ETF (VB): 0.10%

  • Vanguard Small Cap Value ETF (VBR): 0.20%

  • Vanguard Real Estate ETF (VNQ): 0.25%

If you use Ellevest’s online platform, the portfolios we recommend are personalized to each of your goals, so some portfolios will contain these funds and some will not. If you have a high equity (stock) allocation, you likely have small positions in all four of these ETFs.

Right now, the highest amount of exposure in any Ellevest portfolio to US private prisons is 0.02%, or 2 cents for every $100 invested.

While some might argue these amounts represent fractions of fractions, we are reviewing other investment options that are private prison-free. We will update you as we identify suitable alternatives that meet our fiduciary standards.

Why were they there in the first place?

In the investing world, it’s very hard to find funds that exactly match any specific social mandate. In our research so far, we have found only one ETF that has an explicit mandate to address racial inequality. Most indexed ETFs are built to match the market — and the market is subject to systemic racism just like any other system. The other problem is that while a fund might not have any positions today that would violate that mandate, it could tomorrow.

We are also a fiduciary, registered with the Securities and Exchange Commission, which means we are legally obligated to act “in our clients’ best interest.” That is a regulatory phrase, and from the regulator’s perspective, that doesn't include social issues — no matter how urgently they need to be solved — or alignment with personal values.

Often, investment options with specific social mandates are more costly than those without one. And such options are rarely offered in each of the asset classes that we use at Ellevest. As a fiduciary, we must offer investments that are suitable for the client, weighing the economic considerations of switching a client to a potentially less diversified, more costly portfolio against its impact benefits.

Ideally, we want low-cost investment options across all asset classes that invest in companies that are working to address racial and gender inequality. We are committed to continuing to look for them — and pressing fund companies to create and offer them. Until then, we’re obligated to keep researching and weighing tradeoffs to find suitable investment options, as a firm committed to racial justice and one serving as a fiduciary to our clients.

Divesting vs investing for impact

Divestment is the act of eliminating (or reducing) financial assets from your investment portfolio with the hope of lowering a company’s market value — which would force it to change bad behavior. The divestment of a small amount, such as 0.02% across our portfolios, may be morally right, but unfortunately, the economic impact to private prisons likely won’t be sufficient to motivate change.

Research shows that divestment has historically failed to produce meaningful long-term change, because markets are made up of players who are economically motivated. For every investor divesting for ethical reasons, others are ready and willing to step in and buy at prices that are now cheaper than before.

At the same time, dismantling systemic racism spans many, many additional problematic areas beyond private prisons. These include predatory lending. For example, in 2018, the city of Sacramento filed a lawsuit against Wells Fargo after finding that Black and Latinx homebuyers were pushed into higher-cost loans because of their ethnicity. Also included is hiring discrimination and human rights — and yes, even climate change has a disproportionate impact on Black and Latinx people.

This doesn’t mean we shouldn’t divest — only that we need to continue seeking other solutions while we do.

What might investing for real change look like?

Divestment hasn’t historically worked to effect true change, but investing out of something is only part of the picture. We believe that investing in something can be a powerful way to make an impact. Our focus on investing for impact so far has been on gender equity and getting more money into the hands of women. In our online platform, our Ellevest Impact Portfolios are invested right now in mutual funds and ETFs with either an environmental, social, and governance (ESG) focus, or a gender lens, or both.

We’re actively working and researching how we can most effectively build portfolios we believe will make an impact. Here’s how we’re doing it:

  • Working with fund managers to integrate not only a gender lens but a racial lens into their investment processes.

  • Asking fund managers to find more Black-owned businesses that need growth financing.

  • Researching the many connected areas that disproportionately harm Black people and other people of color, so we can add them to our investing lens.

  • Finding ways to make our online investing platform better able to meet the unique needs of Black women, Latinx women, and women of color.

  • Pressing fund companies to offer more investment options with a racial lens.

It is with this wide lens that we view racial equity. We will continue to share with you, our Ellevest community, as we learn and progress in our efforts to invest for racial and economic equality.

You can work for real change, too. You can ask the other financial companies you work with — your 401(k) provider, your bank, other financial advisors — these same questions. How can you help me invest in a way that is anti-racist? Do you invest in, or lend to, private prisons? Do you invest in a way that aims to get more money in the hands of Black people?

And, of course, you can keep up your questions and suggestions for us here at Ellevest. Always. Send us your thoughts anytime.


Disclosures

Includes The GEO Group (GEO) and CoreCivic (CXW).

© 2020 Ellevest, Inc. All Rights Reserved.

*Includes The GEO Group (GEO) and CoreCivic (CXW).

Information was obtained from third-party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.

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.

Information was obtained from third party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.

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.

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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.