Robo offers SRI portfolios supporting racial justice

OpenInvest will overweight companies with a track record of improving racial equality while avoiding those that harm minority communities

Jun 6, 2019 @ 2:27 pm

By Ryan W. Neal

OpenInvest, a digital advice startup focused on impact investing, is introducing a new spin on socially responsible investing by building portfolios consisting only of companies committed to racial justice, both in the workforce and among executive leadership.

Racial justice portfolios at OpenInvest will overweight companies that have set quantitative targets for racial diversity in their employee base and regularly publish diversity reports about each company's employee base.

The goal is to empower investors to use their financial assets to hold U.S. corporations accountable for persistent socio-economic inequality, said Claire Veuthey, OpenInvest director of ESG and impact.

"Diversity is not easily defined, and we know that lip service to diversity does not necessarily equate to real diversity," Ms. Veuthey said in a statement.

She cites a study from the Alliance for Board Diversity and Deloitte that found white men hold 66% of all Fortune 500 board seats and 91% of board chairmanships. Meanwhile, only three CEOs in the S&P 500 are African-American.

(More: Assigning a chief diversity officer doesn't fix an inclusion issue)

Though the data is far from perfect, as companies don't always meet their stated goals or even report progress, Ms. Veuthey said it's an important starting point. It's more about rewarding companies that are moving the needle, and OpenInvest plans to make its requirements stricter over time.

"I'm not going to pretend that any of these companies have arrived, but the fact that they are under pressure, it's really helpful for everyone," Ms. Veuthey said.

She also wanted OpenInvest to keep investors clear of companies that actively harm minority communities. According to the Political Economy Research Institute of University of Massachusetts Amherst, 15 of the top 100 corporate air polluters emit the majority of their pollution in regions with a predominantly minority population.

(More: Diversity of thought, plus a culture of inclusion equals a prosperous future)

To address this, OpenInvest will also divest from companies named in recent diversity controversies or that disproportionately pollute in low-income or minority communities.

OpenInvest builds portfolios using direct indexing, the process of replicating the performance of an index fund by buying the individual underlying securities. Proponents of direct indexing say it has tax advantages and allows for greater customization of portfolios compared to ETFs.

For example, an OpenInvest client can buy a portfolio that filters for racial justice and for climate change, or whatever other cause may be important to the investor. Investors also can remove or add individual equities as they see fit.

Portfolios on OpenInvest typically contain at least 300 equities, with the robo's proprietary algorithm maximizing exposure to companies excelling at a certain cause, minimizing those doing poorly and removing those who fail. Ms. Veuthey said tracking error to the S&P 500 is generally less than 1%.

"Returns don't have to be concessional," she said.

Direct indexing has been offered to ultra high-net-worth investors for a long time, but new technology is bringing it down market. OpenInvest takes advantage of fractional share capabilities from digital custodian Apex Clearing to offer direct indexing to accounts as small as $100.

OpenInvest also partners with InteractiveBrokers and Schwab Advisor Services to offer its cause-based portfolios to financial advisers and institutions. Ms. Veuthey was unable to provide specific numbers, but said the majority of OpenInvest's assets ($42 million, according to its most recent Form ADV) are from its institutional business, while the majority of accounts are smaller investors on the retail side.

Peter Krull, CEO and director of investments of Earth Equity Advisors, an SRI-focused registered investment adviser, said racial diversity and justice is an area lacking investments, even as the market for ESG and SRI funds explodes.

"It's not surprising that a startup would seize upon that opportunity. The timing is right, and the newest studies show that more and more people are interested in responsible investing," Mr. Krull said.

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