By Matt Onek

It has been inspiring to be part of the rapidly growing impact investing movement over the last several years, as foundations and their partners have committed more of their assets to social and environmental change. In the midst of this growth, Mission Investors Exchange (MIE) and our 250 members have taken a leadership role in keeping “impact” at the heart of the movement. But one critical element of “impact” has received insufficient attention: racial equity.

By 2020, median white American households are projected to own 86 times more wealth than African-American households and 68 times more than Latinx households. Significant racial disparities also exist in employment, educational attainment, access to healthcare, incarceration rates, and many other aspects of American life.

It is therefore crucial that racial equity become a central part of the impact investing movement. That’s why MIE recently started on its own journey in pursuit of racial equity, working both to evolve our internal practices and to surface best practices in the philanthropic community at MIE’s 2018 National Conference and as part of the Racial Equity track at SOCAP 2018. These and other collective efforts led up to this series, launched with a companion essay by La June Montgomery Tabron, president of the W.K. Kellogg Foundation.

In a field in which a disproportionate number of leaders, like me, are white men, this series aims to present a diverse set of philanthropic voices. Together, MIE, Tabron, and the nine other foundation presidents will lay out the moral and economic imperative for action, as well as concrete ways philanthropy can ensure that racial equity is at the center of the impact investing movement as it continues to scale.

Moving from Positive Intentions to Bold Action

While the foundations that are using impact investing to advance racial equity embrace a wide range of investment strategies, they all started by stating a strong and intentional commitment to racial equity. As part of this process, they have undertaken the hard work of internal learning, investing time to understand how bias shapes their own thinking, as well as the systems and markets that impact the people and communities they serve.

Once foundations commit to racial equity, a world of investing opportunities opens up, with tremendous potential to positively impact individuals, organizations, and systems. Indeed, organizations can use all the tools in the impact investing toolbox—including program-related investments (PRIs) and mission-related investments (MRIs), investments in asset classes ranging from fixed income to private equity, and shareholder advocacy.

In deciding how to deploy these tools toward racial equity, investors are focusing on who controls and receives capital as it flows among asset owners, asset managers, intermediaries, investees, and the ultimate beneficiaries of products or services. We explore these questions below.

Who Allocates Capital?

People of color have often been locked out of positions that make investment decisions. And as Tabron explains in her essay, unconscious biases among decision makers can have a deep impact on the allocation of capital to individuals and communities of color.

To address these concerns, many foundations are examining and increasing the diversity of their own boards of directors, investment committees, and staff. They are also working to direct capital toward advisors and fund managers of color. Some, such as the Ford Foundation, consider this support of diverse investment decision makers as core to their overall impact investing strategy. Several foundations are also working to reduce racial biases by all investment decision makers by investing in firms like Illumen Capital LP, an impact investor that provides its fund managers with bias-reducing strategies to unlock latent financial return and impact.

Who Receives Investments?

Organizations led by people of color—whether small businesses, new ventures, or intermediaries, such as community development financial institutions (CDFIs)—often experience underinvestment. To address these disparities, foundations are examining and changing the demographics of the leaders they support, both through direct investing and intermediaries, and through PRIs and MRIs.

Northwest Area Foundation’s support of Native-led CDFIs, for example, ultimately helps revitalize local economies while directing investment capital to Native-led businesses. And Mary Reynolds Babcock Foundation’s CDFI strategy is oriented around supporting businesses, housing, and community facilities that benefit low-wealth communities and people of color in the South.

In addition, many foundations are increasingly investing in broader funds that target entrepreneurs of color. The Detroit Entrepreneurs of Color Fund, created by Kellogg Foundation, JPMorgan Chase, and the Detroit Development Fund, for example, more than tripled in size in 2018. Invest4All, an initiative of Prudential Financial, the Annie E. Casey Foundation, and Kresge Foundation, is focused on low-income communities of color in the South and invests in entrepreneurs of color among a variety of financial inclusion strategies. And Impact America Fund, supported by Prudential, Surdna Foundation, and Kellogg Foundation, directs capital to overlooked and underserved markets, with an emphasis on supporting leaders who have first-hand experience with the problems they seek to solve.

Who Is the Beneficiary or End User?

Impact investing capital, of course, ultimately supports programs, products, or services that directly address the needs of specific individuals and communities. Given the historic, systemic barriers for individuals and communities of color—including a lack of access to high-quality education, health services, affordable housing, and banking—it matters greatly who impact investments ultimately serve, and where service or product gaps disproportionately affect people of color.

Foundations are actively seeking to understand who benefits from the organizations in which they invest and targeting their investments accordingly. As noted, many strategies focus on supporting historically underserved communities of color in specific places such as Baltimore, Detroit, the American South, or Native American tribal lands. Other efforts seek to tackle sectors or systems that disproportionally underserve people of color, like Lumina Impact Ventures’ focus on post-high school learning and The California Endowment’s work in health. Still other investment strategies focus on solutions to systems and industries that negatively affect people of color, such as private prisons and predatory lending.

The individuals and organizations in the flow of capital often play more than one role. For example, we can characterize CDFIs led by and for communities of color as both investees and investors—both receiving capital from foundation investors and then deploying that capital to individuals, organizations, and communities. Foundations that hire and invest in leaders of color break down barriers for those individuals, as well as support the broader societal transformations those individuals can help achieve.

Making Racial Equity Central to the Impact Investing Movement

Philanthropy is ideally positioned to lead the charge for racial equity. Free to challenge status quo systems and free to use the power of their endowments to tackle societal challenges, foundations can ensure that racial equity becomes central to the growing impact investing movement. Some foundations, like Mary Reynolds Babcock and Winthrop Rockefeller, are even exploring bold commitments to align their entire endowments with their racial equity goals.

But this series makes clear that there is a broad range of approaches that any foundation can use. Now is the time for philanthropy and its partners throughout society to embrace their responsibilities and maximize their unique capabilities. Together, we can ensure that the impact investing movement plays a major role in the pursuit of racial equity.

from SSIR Blog

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