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The US legacy of inequality based on race and ethnicity is rooted in centuries-old policies and practices that were designed to provide greater opportunity and wealth to some people (white people) and less opportunity and wealth to others (people of color). These practices were sometimes promoted at the outset as “race-neutral,” while in actuality they were nothing of the sort. For instance, policies such as the G.I. Bill granted opportunities to build wealth but were implemented to benefit white Americans while suppressing others’ access to those opportunities. Over time, investors have done little to break the economic divide; indeed, in many cases investment practices have only served to reinforce the accumulation of wealth among a small percentage of people.
Investors cannot alter centuries of structural racism that have led to economic inequality on their own, but they can support ways to help build an economy that provides opportunity for everyone. In this report, we look at some ways that investors are attempting to alter the economic paradigm through their investing practices.
People of color in the US earn far less and possess a fraction of the household wealth of white communities. The disparity reflects, in large part, 20th century policies such as the New Deal that set the stage for the emergence of a robust middle class but also embedded discriminatory practices that severely limited the participation of communities of color in that upward mobility. Many decades on, the overhang from these policies persists, and for many households of color were exacerbated by the impact of the 2007-09 recession.
Household wealth underpins financial security, helps families weather difficulties such as health issues or natural disasters, and enables people to maintain their standard of living during periods of unemployment. Family transfers of wealth are key to funding higher education, the formation of businesses, and home ownership for the next generation.
The implications of this wealth disparity go beyond the disadvantages it creates for the people directly affected. People of color will become the majority of the US population as early as 2045, according to a new US census projection. If the current income and wealth gaps between whites and people of color remain static, the overall pool of investment capital for entrepreneurship and home equity will be concentrated in fewer hands and sectors of the economy. This could fuel social instability and create major headwinds for future US economic growth.
Whether motivated by a desire to address racial inequities or concern about the future health of the US economy overall, investors are interested in understanding concrete ways to invest toward a more equitable economic playing field — one that fosters the creation of durable wealth. Investors are increasingly seeking companies, funds, and other assets that address long-term risks resulting from racial inequality and that are positioned for success if society moves to confront the status quo. We have assessed how investors may be able to contribute to solutions to three of the main current components of wealth inequality:
- Income inequality: Lower incomes result in less savings and, over time, less wealth. This leaves fewer resources available for the next generation.
- Home ownership and affordable housing: Less access to affordable home ownership deprives families of an important source of household wealth. Given the lack of family financial transfers that can help with a down payment for a home, lower family income, or other financial impediments, families of color may not have access to low-cost financing to purchase a decent home — or any home at all.
- Access to capital: Less access to affordable loans can diminish household savings. High-cost debt payments for educational loans, car or consumer loans, or mortgages may hinder a family’s ability to build wealth. Less access to reasonably priced commercial loans to start or grow a business may also impair a parent’s ability to pass wealth on to children.
In crafting impact investment strategies, Cornerstone Capital Group evaluates how investments can improve access to resources needed to improve individual, community, and societal outcomes. In considering what investors can do to help break the cycle of racial and ethnic wealth inequality, we look for ways to foster wealth creation by tackling those three challenges.
- Investing in deposits at Community Development Financial Institutions (CDFIs) will help those institutions invest in underserved communities through affordable commercial, consumer and mortgage loans. Access to affordable mortgages helps families build wealth through home ownership. Access to reasonable consumer and educational loans helps families save on finance costs so they can put extra money into savings accounts. The ability to start or build a business with access to reasonable commercial loans is an excellent path to building household and community jobs and wealth.
- Fixed income or alternative funds focused on impact in underserved communities can provide reasonably priced loans to businesses and for commercial properties and owned housing in neighborhoods of color. Again, these funds can help people of color build wealth through home ownership, entrepreneurship or ownership of a property, and can enable a local business to remain in its neighborhood and not be driven off by escalating rents.
- Through crowdfunding, investors can help repair household balance sheets of overleveraged individuals by swapping high-cost consumer, educational or mortgage loans for restructured, affordable, lower-cost loans. These lower-cost loans might substitute for family financial transfers and allow adult children to build wealth.
Fortunately, the scope and number of investment vehicles designed to improve access to housing and capital is broadening along with growing interest in targeting investments for impact.