Consider an exchange-traded fund that’s small, with only $4 million in assets after nearly two years in existence, and charging a high management fee — 76 basis points — that enables investors to access a feel-good strategy that’s very of-the-moment.
If that sounds iffy, think again. The fund, the Impact Shares NAACP Minority Empowerment ETF /zigman2/quotes/208604010/composite NACP +0.96% , is the only financial product that explicitly addresses issues of racial inequality, doing so with the backing of one of America’s oldest and most prestigious civil rights groups.
It’s also a blueprint for how mission-driven organizations can engage the corporate sector in making social change, especially around racism, an issue that often seems forgotten in a financial services landscape crowded with other “socially responsible” plays. And at a moment when America’s attention is squarely on racial justice, it may check investors’ boxes.
“As people lose confidence in Wall Street’s ability to generate alpha, they’re going to look for other ways to derive value from their capital,” said Ethan Powell, founder of Impact Shares, a first-of-its-kind nonprofit ETF provider.
Socially responsible investing, Powell thinks, is “a natural extension of that, but the financial services industry doesn’t have the acumen for it.”
That’s where the National Association for the Advancement of Colored People, founded in 1909, comes in. The organization has a long history of corporate engagement, said Marvin Owens, its senior director for economic programs, but saw involvement with the ETF as a way to spin that work forward.
The NAACP developed a list of 10 principles, called “ screens ” for the purpose of the ETF, ranging from the familiar, like board and executive team diversity, all the way to lesser-known ideas like how companies address the digital divide and support local community development programs.
Index and research provider Morningstar developed an index around those screens, and Sustainalytics, a third-party vendor, does the due diligence on companies inside the index.
In theory, the NAACP should share in a cut of the ETF’s profits, but that won’t be possible until it reaches $20 million in assets.
But for Owens, the work put in to create actionable ways of assessing companies has been more than worth it. Corporations often support the NAACP in ways he called “transactional,” such as paying for ads or buying tables at events.
“The ETF has allowed us to engage corporations in discussions: what is your commitment to a diverse board, to supplier diversity, and so on,” Owens told MarketWatch. “With corporations that have funded us historically, the ETF has allowed us to step back and say, we thank you for your support, but the data shows this or that. It gives us credibility, takes away from the idea that the NAACP can be paid off.”
The match between ImpactShares and the NAACP came courtesy of the Innovative Finance team at the Rockefeller Foundation, which has funded ImpactShares, as well.
Lorenzo Bernasconi, that group’s managing director, also applauds the advocacy that the index framework permits, but thinks the ETF can unlock even more opportunity. “We face a whole set of large environmental and social challenges which government and philanthropy cannot address alone,” Bernasconi said. “The ETF builds on two major trends in capital markets: an interest in impact investing and a shift toward passive investments.”
Many smaller fund issuers face a vicious circle: they can’t attract assets unless they have enough assets to convince would-be investors the fund is a safe bet. That’s a real concern for Ethan Powell, who says that, as the manager of a nonprofit, he works “pro bono” and all his vendors offer concessions of some sort.