Inequality as an investment risk

One thing seems clear: 2020 has torn up the script on short-term thinking. COVID-19 and the murder of George Floyd (among so many others) have exposed the long-standing inequities between poor and affluent Americans.

The disparity cuts across Black Americans within every metric. Black Americans are hospitalized for COVID-19 at a rate five times that of white Americans. Black Americans are dying from COVID-19 at a rate three times higher than White Americans. Black Americans are more likely be unemployed than white workers, and if working, more likely to work a front-line job. Black Americans are more than twice as likely to be “food insecure” than the average American. A Black man is also 2.5 times more likely to die at the hands of the police than a white man.

These stark statistics reflect a disparity that underscores issues of systemic racism and the legacy of slavery on American soil. 

SYSTEMIC RACISM: WHY IS THAT SURPRISING?

To recap, the Atlantic slave trade began starting around the 1500s. Beginning in the latter half of the 16^th century, kidnapped Africans started arriving in North America. For the next 300 years, the economics and adolescence of the United States was defined by a large enslaved labor force. Three hundred years. Long after the global slave trade ended around the turn of the 19^th century, the United States marched on with slave labor within its borders as an economic system.

It was only through a Civil War some 60 years later and an actual amendment to the constitution that conditions changed legally for Black Americans. Even so, the change was almost symbolic. Black Americans endured another 150 years of horror: Reconstruction, organized violence, Jim Crow laws, redlining and displacement by highway, mass incarceration, the school-to-prison pipeline and financial exclusion. There were also restrictions on civil rights that affected voting, buying homes and segregated education. And now, largely as a result of the imbedded inequality in this country, outsized death by COVID-19.

America’s legacy of slavery has been crippling and it should be very clear that systemic racism is real. Change has not happened fast, fairly or significantly enough for Black Americans. This is a human rights crisis right in America’s back and front yard and streamed into American living rooms (apologies to Gil Scott Heron). 

WHERE DOES ESG FIT IN?

Although it represents just one small reflection of American culture, environmental, social and governance investing will push to address this inequality. ESG investors will certainly try to create more diversity on their largely white investment teams and companies. They will also address it in the ESG investment process, which is fine-tuned by social mores. One of ESG investing’s most compelling ideas is to “future proof” portfolios for the world into which we are heading. Hopefully, that world looks very different for Black Americans.

Climate change can provide the road map. It was ESG investors (not Wall Street) that demanded an entirely new dataset to allow investors to measure exposure to carbon, emissions, carbon intensity and -- to a lesser extent-- which companies are participating in a broad effort to reduce carbon emissions. You will see a repeat of this as a result of COVID-19 and the coalescing of the Black Lives Matters movement. 

ESG investors might initially focus on these issues:  

• Shareholders will demand that companies produce plans to diversify their workforces, board rooms and management ranks. There will be more interest in on diversity and inclusion and the investment tools being developed to measure the factor. One example is the Diversity and Inclusion Index.
• ESG investors will look to corporate America to help lessen income inequality issues that are hampering the long-term economic prospects of America. This will be additive to GDP and will take a total public-private commitment.
• ESG investors will continue to pressure technology platforms to help curtail, rather than spread, racism or enable voter suppression through disinformation. This will become a huge focus.
• ESG investors will push back against artificial intelligence and algorithms that codify racism. Yes, many algorithms are racist. This racism manifests in internet search engines, mortgage loan approval programs, policing programs and many other areas of life. It is pervasive. Algorithms are created by people, and they reflect a thousand points of bias. As we enter a world where they dictate corporate, consumer and public policy behavior, this needs to be addressed. 

Even with decades of climate analysts screaming “fire,” it took decades of pressure by ESG investors to convince Wall Street to see the smoke. America suffers from systematic racism. It’s in plain sight. Black and white. It now threatens the recovery from COVID-19, economic long-term growth and the well-being of the nation. ESG investors will likely lead the charge to address these issues on the investment playing field. It will be one small part of what needs to be a huge effort to stem economic inequality in America and the abhorrent disparity in experiences between Black and white America. 

Blaine Townsend is executive vice president and director of sustainable, responsible and impact investing at Bailard Inc.