With the growth of investment strategies focusing on socially responsible investing, there are many angles for institutional investors to consider.

A new report by Cambridge Associates indicated investors putting dollars to work with racial equity in mind will gain an advantage in the long term. While the report noted there are many potential definitions for social equity investing, it defines the term as building a portfolio that promotes equal opportunity for all, regardless of background.

Read: Is gun control the next big ESG issue for institutional investors?

Serious inequalities in access to opportunity and income in the U.S. aren’t only firmly established, they’re growing, noted the report. Citing research by think tank the Brookings Institute, it showed wages have stagnated in the U.S. since the 1970s. In 1940, 90 per cent of people earned more at age 30 than their parents did at the same age, but that percentage dropped to 50 per cent in 1980.

This is just one indicator of how inequality and decreased access to opportunity has become a major headwind for economic growth, noted the report. “There is real economic opportunity to be gained from creating more inclusive economies. The Center for American Progress estimates that if the racial education achievement gap were closed, the U.S. economy would be nearly $2.3 trillion larger in 2050,” it stated.

The report identified eight core issues to address in social equity efforts: racial equity, gender equity, transportation, affordable housing, civil rights and practices, financial inclusion, health and wellness and education. While most of these core issues are investible, the report noted, some are better addressed by policy and philanthropic efforts.

As well, the report stressed that while the core issues are presented as distinct areas of focus, they’re all interconnected. Investors seeking to make an impact on a distinct issue should recognize that the other issues will play a part in the outcome, it stated.

Read: Investors cite returns, risk management as drivers for ESG integration

This is evident when examining statistics relating to multiple issues. Black Americans are the most likely to see children suspended from school, have the highest incarceration and poverty rates in both rural and urban communities, as well as the highest rate of new HIV diagnoses, according to the report. That said, black Americans, along with other people of colour, represent a significant and growing economic force, it noted.

“Successful capital deployment to support communities of colour also requires an understanding of the economic viability of those markets,” stated the report, noting that research in this area is on the rise. “The Selig Center for Economic Growth found that racial minority groups represent the fastest gains of buying power within the United States. It estimated that the combined buying power of blacks, Asians and Native Americans in 2016 was US$2.2 trillion, a 138 per cent gain since 2000. The study also estimated that the buying power of Hispanics increased by 181 per cent to US$1.4 trillion. In contrast, the buying power of white consumers only increased by 79 per cent during this same period.”

The report identified a two-fold approach for investing with racial equity in mind. First, it suggested investing in ways that increase capital flows to communities of colour with the aim of closing the long-standing gap. Second, it recommended boosting efforts within existing investments, building on current work and ensuring businesses are implementing practices with the aim of increasing access for people of colour.

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The report provided examples of how this can be implemented across all asset classes. For example, in order to gain exposure in virtually any asset class, an institution can invest in a public equity firm led by a woman of colour. Within the private equity portfolio, it illustrated the example of investing venture capital with a Hispanic-led startup or implementing a real estate strategy that supports the development of communities of colour.

Private debt investments can also be structured to increase the capital available for businesses owned by racial minorities, noted the report. And in public equity, investors can engage with established companies, encouraging them to develop more substantial diversity practices. In addition, investors can screen for certain businesses within their public equity strategies to avoid firearms, predatory lending and for-profit prisons.

“When building a portfolio with a social equity lens, investors should remember that there is no one-size-fit- all approach,” stated the report. “Due to portfolio construction constraints, not all solutions or structures will be applicable or relevant for all investors. This is OK. Investors should be aware of the opportunities and limitations of their own capital pools, and take that into account as they seek to create solutions.”

Read: Institutional investor group identifies 61 more companies for climate change focus

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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