What is Racial Justice Investing? Here's What to Know

In recent years, social justice issues, particularly race-related issues, have come to the forefront of public discourse. As a result, individuals and organizations are looking for ways to make a positive impact and promote social justice values. One area where this impact can be made is through investing.

Also known as social justice investing or racial equity investing, racial justice investing is a form of investing that promotes racial equality and the dismantling of systemic racism.

Through responsible investing, individuals and organizations can use their financial resources to address social disparities and issues that disproportionately impact communities of color. The ultimate goal of these investments is to create a more equitable and just society.

Understanding Racial Justice Investing

Infographic on types of racism: structural, institutional, interpersonal, and individual discrimination.

Investors have the opportunity to use their financial resources to drive social change. By directing investment capital towards historically disadvantaged groups, investors can change existing systems and make socially responsible investments that align with their values. This practice is frequently referred to as impact investing.

Racial justice investing is a form of impact investing that promotes anti-racism initiatives, racial equality, and leadership diversity. It seeks to combat structural racism and provide financial support to forward-thinking companies. The predominant focus is to provide communities of color with access to resources while generating investment returns.

One trending question investors ask is how they can redirect the investments in their portfolio away from companies with harmful practices. Racial justice investments don’t focus solely on racial diversity and social movements. Instead, investors consider social justice factors when determining where their money should go.

Environmental, Social and Governance Investing

Commonly referred to as ESG investing, this sustainable investment strategy evaluates financial returns and overall impact based on environmental, social, and governance factors. Companies are given ESG scores that measure their performance in these specific areas.

As you might expect, ESG investments are critical in social justice investing. While some ESG mutual funds address a wide range of issues, it’s common for investors prioritize a specific ESG theme, such as racial justice. Companies aligned with ESG values tend to have reduced employee turnover and compliance costs, making them an attractive option for investors.

Types of Racial Justice Investing

Social justice investments encompass a wide range of investment strategies. From mutual funds to justice stocks, approaches are varied and typically reflect the investor’s values. Some of the different types of racial justice investing include:

Direct Investments in Minority-Owned Businesses

Minority-owned businesses have historically been excluded from traditional forms of funding, like bank loans. To address this, some mission investors directly support startups, enterprises, and other businesses owned by racial minorities. There’s a very real risk to direct investments, but this form of investing gives investors more control over where their money goes and how their funds are used.

Community Development Investments

Investing in businesses can support marginalized communities, but community development investments offer more immediate assistance. These investments are generally handled by community development corporations (CDCs) and focus on initiatives that support communities. This could include investments in community health clinics, affordable housing, and other practices that can revitalize struggling communities.

Social Justice-Oriented Portfolios

Personal Capital Website — Personal Capital / Personal Capital

Underlying investments, like stocks and mutual funds, are a reliable and sustainable investing solution. Companies like Personal Capital Align use data screening to create pre constructed ESG portfolios using strict social criteria. A social justice oriented portfolio is an excellent option for investors that prefer professionally managed assets.

Community Pies

M1 Finance Website — M1 Finance / M1 Finance

These pre-made portfolios allow investors to align underlying investments with specific causes, such as black or AAPI-led companies. Instead of ignoring social justice factors, investors can support publicly traded companies that share their values. This service, offered by investment platforms like M1 Finance, allows investors to focus on a single cause or create varied portfolios that reflect their values.

Crowdfunding

FundBlackFounders Homepage — FundBlackFounders / FundBlackFounders

Members of marginalized communities often have limited access to traditional opportunities. That’s why it’s common for minorities to use crowdfunding to raise business capital. Many crowdfunding platforms, like FundBlackFounders and the AsAmCrowdfunding effort, allow investors to support minority entrepreneurs.

Peer-to-Peer Lending

Like crowdfunding, peer-to-peer lending companies offer alternative financing options for individuals who may have been excluded from traditional lending sources. These loans are not tied to the stock market and have no minimum investment requirements for those looking to lend.

Exchange-Traded Funds (ETF)

An ETF is a collected investment security that trades on public markets. Some funds, like the NAACP Minority Empowerment ETF, specifically support companies with a commitment to addressing social and political issues that affect minorities. This ETF’s top holdings include Apple and NVIDIA.

See Related: Best ETF Brokerage Options

Impact Investing Networks

Investment networks like Mission Investors Exchange are a place for investors to form partnerships and find opportunities for investing sustainably. They essentially function as a matching service and can connect active investors with entrepreneurs, local business owners, and other people and groups in need of capital.

Real Estate Investments

Many real estate investment trusts (REITs) work to address social crises, such as the shortage of affordable housing in disadvantaged communities. Discriminatory practices like redlining have made it difficult for minorities to achieve home ownership, which is a reliable way of building generational wealth. By investing in REITs and other real estate projects, investors can address these issues and support efforts to increase access to housing.

Divesting from Companies with Harmful Practices

While there are many types of racial justice investing, all of these investments share a common goal. From direct investments to public markets, investing can be a powerful tool for social change.

The Rise for Racial Justice

Recent protests and the rise of the Black Lives Matter Movement have heightened awareness of the systemic nature of racism and inequality. As a result, investors, foundations, and corporations are searching for ways to make a positive impact on racial equity.

Investors are becoming more aware of the impact their investments have on society. Not only are investors supporting companies with a commitment to diversity and inclusion, but many investors are examining their portfolios more closely to ensure that they aren’t investing in companies with harmful practices.

The fight for racial justice is complex and constantly evolving. While it will take time to achieve true racial equity, there are many ways investors can use financial resources to empower minorities. Investments provide opportunities across public and private sectors, helping to address inequities and helping members of disadvantaged communities achieve financial success.

Using Investment Capital to Build Racial Equity

Banks, venture capitalists, and other investors determine who receives funding. Historically, investing has been used to create wealth within communities. While many have benefited from these investments, the traditional investment system has not always been equitable and frequently excludes communities of color.

A key example of this is redlining, which is the practice of denying services, investments, or loans to individuals or communities based on race. This exclusion has resulted in a lack of wealth and economic opportunity in these communities, perpetuating poverty and exacerbating existing racial inequalities.

Racial justice investing seeks to address these historical injustices and create a more equitable investment landscape. By prioritizing investment in companies and communities that support marginalized communities, investors can break down systemic barriers to economic opportunity. This helps to create and maintain community wealth and promote positive social change.

The Social Justice Themes of Racial Justice Investing

Social justice investing often focuses on specific themes, such as education, climate change, or healthcare. Racial justice investments typically focus on themes that positively impact people of color.

Many institutional investors provide financial backing to companies that are owned by minorities or have made a commitment to racial inclusion. Other investors choose to support specific causes, like education. Investment in education can improve outcomes for students of color, helping to close the achievement gap.

Environmental justice is another theme that many investors focus on. While climate change affects people across the globe, communities of color are more heavily impacted by environmental degradation and other challenges. Investments that support clean energy and sustainable infrastructure projects are a way to address environmental injustices.

In some cases, investors may even use investments to advocate for policy change. Many investors make donations to organizations that are actively engaged in advocating for policy changes, such as non-profits and political action committees (PACs). Investors may also use shareholder activism to influence the behavior of the companies or organizations they support.

See Related: How to Start Investing With Purpose

How Social Justice Investing Can Make a Difference

Ignoring social justice factors can pose a significant risk for companies, industries, and investors. Companies that have a reputation for ignoring diversity and inclusion or mistreating workers may see a decrease in sales and a decline in investor support. Younger investors are reluctant to invest in companies that aren’t socially conscious.

This increased focus on social justice has persuaded many companies to change their practices. Investments have led to increased minority representation in senior management and on corporate boards. Many companies have also introduced diversity and inclusion policies designed to address poor community relations and other systemic issues.

Investments in minority-owned businesses has created a pathway for previously excluded groups to build wealth and strengthen their communities. Social justice and environmental justice are closely linked, and by making sustainable investments aligned with progressive values, investors can build a better world for everyone.

Social justice is a continuous process that requires respect and consideration of the various factors that lead to systemic inequalities. It involves promoting inclusivity, upholding human rights, and recognizing the dignity of every individual.

We live in a rapidly changing world, and people are increasingly aware of the impact racial inequities have on our day-to-day lives. Making investments with a social focus allows investors to address these concerns and make investments that will have a positive impact on society.

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