Racial justice: An emerging risk for investors

How investors are developing an analytical framework on the issue

(Corrects erroneous references to Transform Justice.)

At the beginning of December last year, Lisa Hayles, a principal at Boston Common Asset Management, published a blog on Racial Justice detailing a range of actions being taken in this area which are likely to be unfamiliar to even some socially responsible investors.

For example, Boston Common co-filed with Zevin Asset Management a resolution at Alphabet (Google) calling for executive pay to be tied to diversity targets.

It received around 8% support last summer – which, if you exclude the shares voted by the insiders and controlling shareholders, equates to around 26% backing.

Zevin’s Pat Tomaino said that the resolution had been refiled, with co-filers including Boston Common, Trillium and the Akonadi Foundation, despite two constructive meetings with Alphabet’s head of diversity and inclusion and its assistant corporate secretary, among others.

“There is investment risk associated with practices that are discriminatory.”

The resolution, which wasn’t challenged last year, is focused on getting the company to make it clear that the C-Suite is committed to diversity. Alphabet’s “grass roots, mentor-led strategy” has simply not been effective, said Tomaino. A similar resolution has also been filed at Amazon.

But the blog noted a number of other initiatives being undertaken to tackle the issue of racial justice. RI spoke to Hayles about her work.

“I’m trying to develop an analytical framework that incorporates deliberations around racial justice across all of our work. The framework will cover expectations, policies, processes, products, and people.

“There have been examples of controversies that have arisen that we can respond to, but we want to be more forward-thinking and strategic in our approach and think about it with a total portfolio analysis approach.”

Hayles said that she was trying to put together a set of analyses that would allow investors to look at portfolios from the standpoint of racial justice in the same way they can now look at them in terms of climate risk.

“A group started meeting in the summer of 2017,” she continued, “and has been involved in writing supporting letters that have gone to financial institutions that have lent funds to private prisons, for example.

“The ICCR [Interfaith Center on Corporate Responsibility] has been leading this engagement with JP Morgan and Wells Fargo. In the last year, those private prisons have been benefiting from the ramp up in immigrant detentions, so their business is expanding because of public policy decisions at the federal level.”

Hayles noted that federal policy has exacerbated racial justice problems beyond private prisons. “In the last two years, since the federal election, there has been heightened awareness and concern about racial justice. Investors see that there is a responsibility for us to respond to this, and our clients expect us to. There is investment risk associated with practices that are discriminatory.”But Hayles bemoaned the lack of data on the issue which made tackling it even harder. “At the SRI Conference in Colorado Springs, where I was speaking about gender diversity, there was a professor from Harvard, Frank Dobbin, who is a sociologist whose area of research is diversity initiatives and programmes.

“We want companies to disclose the number of employees who fall into different ethnic categories so we can track that over time. Tech companies have started to do that, but the numbers have not moved much and that was Professor Dobbin’s point; that is the reason companies don’t want to report it.

“He had data that showed that the percentage of African-American managers in corporate America has not changed in the last 25 years, since the late 80s. Following civil rights legislation in the 60s there was some movement, particularly in the federal government, but that stalled out and hasn’t shifted since then.”

I asked about whether the ultimate goal of the project is to construct a portfolio that excludes companies that don’t meet racial justice expectations?

“Yes. We are a manager that incorporates ESG factors alongside financial factors, and we have comprehensive guidelines, and we are active, because we stock pick and we can be very choosy about what we buy. So, there’s lots of stocks we don’t buy. Our ESG analysts and our financial analysts are united in their view of what kind of company we should be investing in.”

Is another aim to engage with companies to get them to reform?

“We don’t purchase companies for the purposes of engagement, though we are developing a list of companies to target. Our guidelines are divided into what we seek, what we avoid, and what we exclude. If there are allegations of problems in a part of a company, that might not necessarily exclude that company. But repeated patterns of behaviour would cause us to exclude. Part of what we’re doing is trying to get companies to disclose. They have to disclose it to the EEOC [Equal Employment Opportunities Commission], but they don’t disclose it to investors typically.” Alphabet does disclose its workforce composition data, but it is unusual in this.

So if companies don’t disclose, how can you tell if they have racial justice problems?

“I think it is important to note that we as a society have a ‘racial justice problem’ and, of course, no industries or sectors are immune from that. There are sectors where this is more evident as an issue: retail, agricultural firms; but there are companies that have a lot of low-wage employees, poorly skilled, and potentially undocumented employees.

“Then again, there are highly-paid industries like tech and financial services where there are examples of culture problems, for example, the walkout at Google. Google employees are becoming more and more vociferous about the company’s strategy, and this will become a risk to the company if the people you are employing are millennial engineers, and they don’t want to work for you.”

So, you’re making assumptions about companies and sectors based on readily available information that a sector or business is at high risk of racial injustice? “Yes, for example we don’t invest typically in the agricultural sector at all. We avoid factory farming operators but do invest in some consumer staples companies that source agricultural products as part of their supply chain so we are concerned about supply chain reporting and monitoring, transparency etc. These practices touch on many issues of concern to us.”

Hayles concluded: “We want to drive improved behaviour across-the-board, so if there are leading practices in a company in an industry we will highlight those. We use the guidelines to identify the best companies available, and we use engagement to drive improvement elsewhere.”

She then referred me to, Transform Finance, a non-profit entity advising investors on social justice issues, which had just held a convening on racial justice.

In an interview with RI, Transform Finance’s co-founder and executive director Andrea Armeni says: “We have done a year and half of research and we are about to issue some guidance for investors. While there are obvious race-related issues in finance, such as implicit bias, the lack of directors of colour, or the racial pay gap, many of the ways in which racial justice manifests itself are not obvious.“These touch on the quality of jobs, as low-quality employment disproportionately affects communities of colour, or municipal finance. If you’re really serious about the issue of racial justice you need to enquire more deeply throughout the entirety of your holdings.”

I asked Armeni to explain how municipal bond investing could help with racial justice. “In municipal finance, for example,” he clarified, “excessive reliance on fines and fees to meet a budget disproportionately affects people of colour, particularly when combined with tax abatements.

“So, if you’re an investor concerned about this issue you might want to take a closer look at your fixed income portfolio.”

He added there was no explicit product or strategy available, like a green bond or a screened portfolio, that you can invest in around racial justice.

Because Transform Finance is an advocacy group, it does not undertake direct engagement like Boston Common and Zevin, but supports investors that seek to engage with the problem.

For example, Armeni pointed to the bail bond industry, which would typically be screened out of most socially responsible portfolios. “Those bonds are backed by insurance companies that you will have in your portfolio,” he noted, “so the insurance companies may be a target for engagement”.