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. This generation has high expectations for companies to address 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 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 will 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 artificial intelligence ethics.
Diversity: By 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 than companies with below-average diversity). We can also encourage structural transformation to support racial justice. For example, we can invest in municipal bonds that seek to ensure people’s equitable access to essential resources and services, like affordable housing, public transit and education.
Climate change: We can encourage businesses and communities to address climate change mitigation and understand the damage climate change causes, knowing very well that it will affect communities of color disproportionately.
AI ethics: Our engagements focused on responsible artificial intelligence ethics and data privacy are aligned with our focus on 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. A landmark 2019 study found that the majority of the algorithms in use across the U.S. showed worse performance for nonwhite faces than white ones—in some cases, much worse. Another study showed that one technology confused a number of black U.S. lawmakers with criminals. AI ethics is still an evolving topic, however, and the technology is also bound to play a material role in upholding human rights in the future. We have been in dialogue with the leading companies producing artificial intelligence and making decisions about data privacy for the last two years. We were encouraged by the actions several companies took in the wake of police brutality protests 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 engagement approach includes proxy voting. As investors, we vote in favor of shareholder proposals that encourage diversity at the companies we hold and discourage institutional racism. For example, our firm voted in favor of a recent shareholder proposal at a company that called on it to evaluate its environmental impact on communities of color. We cast our vote even though our proxy voting service provider recommended we vote against it.
Investment choices: We want to avoid investments that worsen racism and favor those that are working to solve for it. The companies we look to invest in receive high marks for diversity and inclusion, and we consider bonds from issuers expanding access to basic human rights like clean water. In this effort, we study the metrics of employment representation, pay parity, the accessibility of products to communities, companies’ arbitration policies, health and safety records, and how the companies and issuers are affecting the communities in which they operate.
Marginalized populations have suffered for many years from racial violence, unequal access to public health, the disproportionate impact of climate change and many other injustices. These societal challenges are not new, and we expect them to grow in importance and materiality. At Brown Advisory, we are focused on using this global inflection point to further strengthen our commitment to diversity and equity. We have taken many of the actions we ask of companies and issuers—such as improved disclosure, goals for hiring and promotion, and the formation of a racial justice task force. There is more to do. And we will hold companies, bond issuers and ourselves accountable.
Katherine Kroll is a senior institutional sustainable investing specialist at Brown Advisory.