Investor Alert

Sept. 14, 2020, 2:15 p.m. EDT

20 Minutes With: Ellevest CEO Sallie Krawcheck

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Sallie Krawcheck founded Ellevest , a digital investing platform for women based on the belief that women didn’t need to change, the investment industry did. Now Ellevest is applying the same concept to racial justice in investing.

In July, Ellevest introduced a racial justice lens for its Intentional Impact portfolios, a rarity in the investment world. The portfolios were introduced in November 2019 as a way for private wealth clients to move away from investments doing disproportionate harm to women.

“What we found is we didn’t have to do a complete rethink,” Krawcheck says. For instance, screening out gun manufacturing, which hurts women because of domestic violence, but also harms Black people because of police brutality. “By working to advance women, some part of that also was advancing Black people and brown people as well.”

By adding the racial justice lens, Ellevest is shifting away from investments that support industries like private prisons or firearms, or social issues like salary gaps and environmental racism.

“We have taken a choice that we can’t be perfect, but we’d like to work to be good, very good and then great,” she says. “Rather than wait until you can strip everything out of an investment portfolio that can be harmful.” 

Krawcheck, 55, spoke with Penta about what inspired the initiative, the challenge in making shifts in a portfolio, and how it impacts returns.

PENTA : How did the idea for the racial justice lens come about?

Krawcheck : As we watched the protests in the streets, anybody who wasn’t rethinking their belief system, personally and professionally, and questioning how they can be part of moving this country forward in a positive way wasn’t paying enough attention.

We immediately went within our high-net-worth business to our flagship Ellevest Intentional Impact portfolios and said we can’t be for equality for women, if we aren’t also anti-racist.

Are there holdings that get screened out which make a more substantial impact on portfolios than others?

It shouldn’t be a surprise that some of the companies that are screened out are potentially big, widely owned ones. Think about predatory lending, for example, and the role of some of the large banks in that. Think about firearm sales or production. Think about data security issues.

It also shouldn’t be a surprise then, that if racism is systemic, that you can find it in many different places. The real challenge if you were to try to get rid of that completely, given the systemic nature of it, you might not be able to invest in anything.

When I had my own investment portfolio reviewed, we found something like 40% of the stocks wouldn’t meet the first iteration of the gender lens screen. My entire career and life right now is about advancing women and I thought my investment portfolio was backing that, but it wasn’t fully. I reviewed my portfolio again under the racial lens and shifts have been made.

What was the most surprising thing you learned developing the racial justice lens for the Intentional Impact portfolio?

I think it’s a deepening of understanding about the effect that issues like environmental racism can have on people’s lives. Black people weren’t able to get mortgages or loans for certain areas within cities and therefore, were pushed into other areas, like those prone to flooding or pollution unlike white-owned areas. Racism is so systemic that it affects many different parts of our economy in ways the public at large isn’t broadly discussing.

What’s a tip for readers seeking a starting point to improve racial justice in their portfolios?

Unfortunately, it isn’t typically as easy as, ‘Do you own this or that stock?’ It’s not even as easy as, ‘Are you invested in private prison companies?’ It can go so much deeper than that. For example, are you invested in the companies that are supplying the private prisons?

Working with data providers and our partner Ethic, Inc., we provide several levels of sophistication, because we use so much data and a metric-based approach to screen companies out. You could go to AFSC , and look and see what the private prison companies are and look up gun manufacturers to make sure those are out of the portfolio, but it goes deeper. Predatory lenders, for example, are tougher to get to on the surface.

What would you say to people who think returns must be sacrificed to do this sort of investing?

I would say, “Tell me why?” Let’s talk about gender lens, which is a form of impact investing. Why would you have to give up return in order to invest in companies that have more women and greater diversity in their leadership team and on their boards of directors? Research tells us companies with greater diversity in their leadership and boards have higher ROEs (Return on Equity), lower risk, and greater innovation, employee engagement, and customer engagement.

Somehow all of that good would be happening, but the companies are going to lag the stock market? How does that make sense?

We argue there can be “impact alpha” if companies are doing the right thing, whether that’s advancing women, improving the environment, or product safety. There could be a boost to return because of the lower risk of doing the right thing. You only have to look as recently as the Me Too and Time’s Up movements to understand how risk could be mitigated. You only have to look at some of the disruption at companies for incidents of racism to understand how “impact alpha” can be a positive.

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