Issue deep-dive: Racial Justice
Tuesday, March 17, 2020
March 2020
A deep dive of sustainability topics with Ethic's lead data scientist
Issue deep-dive: Racial Justice
Tuesdays with Travis is a collection of monthly interviews with our data science lead, Travis Korte, that explores the complexities of expressing values through data.

In this month’s Tuesdays with Travis we explore the topic of racial justice and how we think about it through the lens of sustainable investing.

Talk to us about how advisors should be thinking about racial justice.

Racial diversity and inclusion topics are underrepresented in lot of ESG investing to begin with, and when I’ve seen them approached I’ve typically seen a lot of focus placed on workplace diversity and discrimination: policies and programs, diversity of the workforce itself, things like that. And while we think those kinds of indicators are important, and they’re absolutely in our models, we really think it’s important to go deeper into the factors that materially benefit or harm people. 

A good place to start is thinking about different ways company behavior can have a bearing on racial justice—not just for employees, but also for customers and the public at large. You’re going to end up uncovering a lot of environmental, social, and governance issues you might not have explicitly connected to race, and that’s going to give a much fuller picture of the topic.

What are the factors to look at related to racial diversity of a company’s workforce? 

There’s a fair amount of workforce data, I think because it’s such a natural place to start thinking about race in public equities. But then the challenge becomes identifying which data really holds up to scrutiny. There’s some data on rates of racial and ethnic diversity in the workforce for U.S. large cap companies, for example, but that data isn’t mandated to be reported at the federal level and so it's all just companies that are reporting voluntarily. That’s a challenge when we’re putting together our sustainability model: if companies are only reporting voluntarily, we don’t have a lot of insight into whose measurement methodologies are more defensible, so it’s hard to make comparisons. 

It’s a little more tractable to start with data on workplace policies and practices that we think support racial justice—that kind of information is much more available. Some of it is more directly about race and some is more about vulnerable groups in general. So, for example, what do the internal diversity and inclusion programs at companies look like? Are there measurable targets they’re trying to hit? Do they have an anti-discrimination policy that just barely complies with U.S. law, or do they do better? Are they offering flexible working schemes for employees who might have non-traditional living situations? Those kinds of considerations. All of that is more available.

When we're thinking about effects on customers and the public, what kinds of factors are we looking at?

It’s really broad. For one thing, there are a lot of relevant factors that we might think of as more general “social” indicators—company behaviors related to poverty, or related to health and safety, for example. And we want to include these factors when we’re talking about racial justice because, at least in Western countries, it’s people of color who get harmed most by these behaviors. So we’ll look at financial companies’ lending practices, because even though they’re not explicitly “about” race, there’s evidence that predatory lending is targeted disproportionately toward minority communities. There’s a similar logic behind why we look at private prisons activity or firearms retailing; prisons and guns don’t just affect people of color, but the harms are worse in communities of color than they are elsewhere.

Another thread is around data that you might not even think of as “social” in the first place. For example, we're looking at things like air pollution and hazardous waste emissions. You’d normally see these kinds of data points much more frequently in an environment-focused investment strategy, but we take them into account when we’re thinking about racial justice for the same reasons we’ve been talking about: pollution is especially relevant to minority communities because those are the communities more likely to live near sources of pollution and experience their negative health effects. You don’t always see it discussed in these terms, but the environment is a racial justice issue too, and it’s going to be really hard to advance ideals of diversity and inclusion without also advancing certain aspects of environmental sustainability at the same time.

We're talking a lot about how we think about racial justice in America. Can you talk a little bit about what it means globally and how we think about measuring it?

That's an excellent question and the short answer is, it's really hard. What race means, and what it signifies, is different in different places. Countries have totally different histories when it comes to slavery and colonialism, and there’s a really wide range of racial and ethnic diversity rates today. For example, in China, there's not a lot of what an American might consider racial diversity, but there is a fair amount of ethnic diversity—there are at least 50 minority ethnic groups represented there.

So if we want to advance the cause of justice for minority groups globally, what we don’t want to do is try to distill the concept of racial justice down into something we can measure in every global circumstance. We think that would be contentious and, anyway, probably intractable. 

Let me give you an example. I saw a data point from some vendor that was like, "board ethnic diversity," and the idea was it would measure the percentage of your board made up of people not from the majority ethnic group in the country in which you're domiciled. But it doesn’t really hold up to scrutiny: Who decides who counts as “not from the majority ethnic group”? What about people who belong to multiple groups? What if most of your operations (or sales) are outside your country of domicile? Are we even comfortable with there being a dataset with some third party’s guess at people’s ethnicities in the first place? Et cetera. That whole approach feels like it’s barking up the wrong tree. We think it makes a lot more sense to look at the social and environmental issues that negatively affect vulnerable groups in general, and not get into the business of specifying who exactly “counts” as vulnerable.

Another reason the racial justice lens is complicated at the global perspective is that companies can have different kinds of impacts throughout their supply chain. You not only want to think about the impacts on, for example, end consumers of some goods, or the community in which the company making those goods operates; you also want to think about the workers that are upstream, producing the raw materials and manufacturing the goods. A company that’s taking actions to advance racial justice for its workers in one region isn’t necessarily advancing racial justice among its supplier’s workers in another part of the world. Maybe a company wants to implement a safer manufacturing process at its American factories, but that would require using a raw material that’s linked to labor exploitation in Southeast Asia. Obviously, global supply chains get extremely complex, so this kind of exercise can start to hurt your brain after a while. But the insight, I think, is that it’s hard to point to any single company’s actions and definitively call them “racially just” up and down the supply chain. That’s another reason we think it makes sense to place special emphasis on systemic issues that affect vulnerable people in general and that we’re confident about measuring, rather than trying to calculate these impossible tradeoffs between different impacts in different places.

What about clients who aren’t already prioritizing racial justice? How should we be framing this issue to them?

There's really three reasons we think that you should care about racial justice. The first is moral, which we've been talking about this whole time: you should fight for racial justice because it's the right thing to do. We want to live in a society where race isn’t an impediment to life, liberty, and the pursuit of happiness, and we hope you do too. 

The second reason is that a more inclusive economy is a stronger economy. There's good, tangible evidence that inclusivity increases aggregate productivity, because it gives talented people a better chance to use their talents.

The third reason is, even if an individual investor doesn’t think inclusivity is important, the market in general seems to. Preliminary evidence suggests that the most diverse companies in the S&P 500 outperform the least diverse ones. Whether or not this link is causal isn’t yet clear, but what is clear is that different sustainability issues can become more financially material for companies over time, as the norms and values of the people who comprise the market evolve. Racial justice is an important issue of our time, and we expect that its growing visibility will bring increasing benefits to the companies most strongly committed to advancing it.

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Sources and footnotes

Travis Korte is the associate director of Sustainability Research & Data at Ethic. Previously, Travis organized civic-minded technologists at Hack for LA and advised a wide range of clients on data science, data policy, and quantitative methods. You can follow him on Twitter at @traviskorte.

Rebecca Hu is director of Sustainability Product at Ethic. Rebecca has spent the last 7 years building technology products to help navigate the complex world of sustainability. Previously Rebecca studied engineering and studio art at Dartmouth College.