Climate change and racism are not identical issues. Rising sea levels are scary, but they do not force us to look in the mirror and confront our society’s prejudices and systemic biases. But climate change is increasingly understood as a risk to investments, health, and justice, and we view social issues like racism in the same manner.

We think one clear factor investors need to consider is the racial diversity and progressiveness of Generation Z, which accounts for 40% of consumers as of 2020. The rising generation has high expectations for companies with regard to sustainability and social responsibility. They want to work for businesses and buy products that reflect their diversity and inclusiveness, and companies are going to need to meet this generation’s expectations to attract their talent and purchasing dollars. Approximately 90% of Generation Z supports Black Lives Matter, and brands that do not clearly articulate anti-racism efforts risk losing this cohort as customers or colleagues.

What We Are Doing As Investors
Deep-seated social inequities such as systemic racism cannot be fixed with a single approach. Efforts on multiple fronts are needed to fully realize the vision of “liberty and justice for all.” In addition to the political and civil debates occurring across the U.S., we believe that investors can and will play a role, and that companies and bond issuers will be held increasingly accountable for the impact they have on their colleagues, communities, and customers.

Our firm’s ESG research process seeks to dynamically respond to complex problems. For many years, we have used this process in an effort to examine a wide range of factors that we believe influence an issuer’s or a company’s long-term health and prosperity, such as employee treatment, customer care, health and safety, and other responsible management practices. These factors are always meaningful for issuers and companies, and social issues such as the Covid-19 pandemic and racial inequality simply reinforce just how important these factors are.

We seek to continue to approach social issues, like racism, through ESG and fundamental research integration, proxy voting, and direct engagement with companies and bond issuers.

Engagement: We are actively promoting racial justice under our firm’s three primary 2020 engagement priorities: Diversity, Climate Change and AI Ethics.

Diversity: Through engaging with companies and issuers on diversity and inclusion, we can encourage them to increase their representation of diverse identities—not just because it is the right thing to do, but because it is also good for business (for example, companies with above-average diversity scores are nearly 20% more likely to have increased innovation revenue compared to companies with below-average diversity). We can also encourage structural transformation to support racial justice; an example is investing in municipal bonds that seek to ensure equitable access to essential resources and services, like affordable housing, public transit, and education.

Climate Change: Through advocating for climate change mitigation, we can encourage businesses and communities to prepare for climate resiliency, knowing very well that climate change will likely affect communities of color disproportionately, as well as efforts to mitigate the damage from climate change.

AI Ethics: Our engagements focused on responsible AI Ethics and data privacy are aligned with our prioritization of anti-racism. Surveillance technology is often embedded with the human bias of those who program it, so it is not entirely surprising to find that technologies such as facial recognition are less accurate for people of color. In a landmark 2019 study, a majority of facial recognition algorithms in use across the U.S. showed worse performance for nonwhite faces versus white faces—in some cases, drastically worse. Another study showed that one technology misidentified a number of black U.S. lawmakers for criminals. AI Ethics is still an evolving topic, but AI is bound to play a material role in upholding human rights in the future. We have been in dialogue with the leading companies producing AI technology and making decisions about data privacy for the last two years. We were encouraged by the actions of several of these companies following efforts led by the Black community in the wake of the recent examples of police brutality highlighted in 2020. Several large technology companies will limit the use of their facial-recognition systems going forward, and will not sell the controversial technology to police departments until there is a federal law regulating the technology.

Proxy Voting: Our decisions regarding proxy voting help complement our engagement approach. As equity investors, we tend to vote in favor of shareholder proposals that encourage diversity and discourage institutional racism. For example, our firm voted in favor of a recent shareholder proposal that called on the company to evaluate its impact on communities of color as it relates to environmental justice. This vote was cast despite our proxy voting service provider recommending we vote against it.