Are ETFs the future of socially responsible investing?


If you’re considering investing in mutual funds, why not invest in a social cause such as racial justice, women’s rights, or the environment?

Back in 2020, Marvin OwensHead of Engagement at Impact shares and former senior director of economic development at the NAACP, saw an opening to leverage corporate discourse on racial justice. This was at a time when many companies were donating to racial justice organizations while trying to figure out how they could make a long-term commitment.

“The truth is, many businesses initially wrote checks,” Owens said. Technically. “A lot of people said they were going to make a lot of changes, but nothing ever happened. There is a reluctance to tackle pressing issues related to racial wealth, income inequality, or simply basic worker issues related to wages.

The nonprofit organization Impact Shares, in its work with the NAACP, is bringing the conversation about racial justice to corporations in a way that aligns more with the corporate comfort zone — coming from a point from an investment perspective rather than civil rights or diversity, equity and inclusion directly .

The investment vehicle? ETFs with asset portfolios that meet criteria that ensure, as Impact Shares puts it in its mission statement, “continuous alignment of corporate behaviors with social values.”

What are ETFs?

An exchange-traded fund, or ETF, is a type of index fund focused on a certain sector. As with mutual funds, anyone can buy shares of TEF, from individuals to corporations. Unlike mutual funds, they can be bought and traded on an exchange. ETFs are not crypto, although there are cryptocurrency ETFs.

With EFTs, investors pool their money to buy a portfolio of assets, which are often sector-specific. You can buy a technology ETF that includes Microsoft, Apple and Nvidiaor a healthcare ETF that includes Pfizer, Johnson & Johnson and Eli Lily.

Socially responsible ETFs operate in the same way, being cause-based rather than sector-based, with net profits going to the non-profit partners.

For example, the NAACP ETFs (NYSE: NACP) tracks Morningstar Minority Empowerment Index U.S. companies that have strong racial and ethnic diversity policies in place. Other socially conscious ETFs include YWCA Women’s Empowerment ETF (WOMEN) and Sustainable Development Goals Global Equity ETFs (SDGA).

Morningstar’s Racial Equity Scorecard is similar to the NAACP’s own scorecard, which has rated companies on diversity and equity for decades. The NACP has 191 holdings, including Apple, Microsoft and Amazon; 29% of its holdings are in the technology sector.

The business of diversity

As these types of scorecards or indexes illustrate, many of the world’s largest and most profitable companies achieve high scores for their DEI efforts — and while that doesn’t prove causation, Insights McKinsey to research showed that companies with the highest level of ethnic diversity are 35% more likely to see financial returns above the industry median than those with the lowest level of ethnic diversity. (Also note: To become a federal contractor, a company must meet diversity requirements.)

Marvin Owens. (Picture via Twitter)

Since 2020, business leaders have slowly begun to see DEI as a strategy that can improve organizational results and investment returns.

“It was a watershed moment, and we were going to make sure justice was a top priority,” Owens said.

In her role, the executive works alongside the NAACP and stakeholders such as businesses and investors to ensure that the NAACP’s mission is “reflected in the social screens we create,” it said. he declares. “Now companies can talk to the NAACP about what a good company looks like. I have a lot of financial market meetings with middle-aged “know-it-all” men. And, we have to kind of disabuse this notion that they know everything and say, “Look, it’s not your job to do an assessment of a company’s commitment to racial justice.” And we inform this conversation.

The reality was that when these companies started asking questions about what a good corporate citizen looks like in relation to racial justice, a lot of people talked about this big issue without input from organizations like the NAACP, which has does the job. for more than 100 years, Owens said.

With its ETF, the trusted voice of the NAACP is now involved in the market.

“This is a really wonderful innovation for the NAACP because it’s an opportunity to create another way of talking to businesses about racial justice,” he said. “And it came from more investors than just a national civil rights organization.”

The future of socially responsible ETFs

As socially responsible investing becomes more mainstream, Impact Shares is receiving requests to launch ETFs covering more of the most pressing “decisive moment” issues of the day, including LGTBQ rights, security of guns and the preservation of democracy, Owens said.

It is a time of all kinds of changes.

“Investors are really driving these conversations in a way where companies have no choice but to pay attention and understand that this is not going to go away.”

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