Are ETFs the future of socially conscious investing?

If you’re going to invest in mutual funds either way, why not invest in a social cause such as racial justice, women’s rights or the environment?

Back in 2020, Marvin Owens, chief engagement officer at Impact Shares and former senior director of economic development at the NAACP, saw an opening to leverage corporate talk about racial justice. It was during a time when many companies were making donations to racial justice organizations while trying to figure out how they could commit long-term.

“The truth is that a lot of companies wrote checks initially,” Owens told Technical.ly. “A lot of folks said they were going to make a lot of changes, but then nothing ever happened. There’s an unwillingness to address the pressing issues around the racial wealth, or income inequality, or just basic worker issues around wages.”

The nonprofit Impact Shares, in its work with the NAACP, brings the conversation on racial justice to companies in a way that aligns more with the corporate comfort zone — coming from an investment point of view rather than civil rights or diversity, equity and inclusion directly.

The investment vehicle? ETFs with portfolios of assets that meet criteria that ensures, as Impact Shares says in its mission statement, “an ongoing alignment of corporate behaviors with social values.”

What are ETFs?

An exchange-traded fund, or ETF, is a type of index fund focused on a certain sector. As with mutual funds, anyone can purchases shares of EFTs, from individuals to corporations. Unlike mutual funds, they can be bought and traded on a stock exchange. ETFs are not crypto, though there are some cryptocurrency ETFs.

With EFTs, investors pool their money to purchase a portfolio of assets, which are often sector specific. You can buy into a technology ETF that includes Microsoft, Apple and Nvidia, or a healthcare ETF that includes Pfizer, Johnson & Johnson and Eli Lilly.

Socially conscious ETFs work in the same way, based on a cause rather than a sector, with net profits going back to the nonprofit partners.

For example, the NAACP ETF (NYSE: NACP) tracks the Morningstar Minority Empowerment Index of US companies with strong racial and ethnic diversity policies in place. Other socially conscious ETFs include the YWCA Women’s Empowerment ETF (WOMN) and the Sustainable Development Goals Global Equity ETF (SDGA).

Morningstar’s racial equity scorecard is similar to the NAACP’s own corporate scorecard, which has been rating companies on diversity and equity for decades. NACP has 191 holdings, including Apple, Microsoft and Amazon; 29% of its holdings are in the tech sector.

The business of diversity

As these kinds of scorecards or indexes illustrate, many of the biggest and most profitable companies in the world have high scores for their DEI efforts — and while that doesn’t prove causation, McKinsey Insights research has shown that companies with the highest level of ethnic diversity are 35% more likely to see financial returns above the industry median than those with the lowest level of ethnic diversity. (Also worth noting: To become a federal contractor, a company must meet diversity requirements.)

Marvin Owens. (Photo via Twitter)

Since 2020, corporate leadership has slowly begun to view DEI as a strategy that can enhance organizational results and investment returns.

“It was a watershed moment, and we were going to make sure justice was a top priority,” Owens said.

In his role, the exec works alongside the NAACP and stakeholders such as corporations and investors to ensure that the NAACP’s mission is “reflected in the social screens we create,” he said. “Now businesses can actually talk to the NAACP about what a good business looks like. I have a lot of meetings in the financial markets with middle-aged guys who ‘know everything.’ And, we’re having to sort of disabuse this notion that they know everything and say, ‘Listen, it is not your job to make an assessment about a company’s commitment to racial justice.’ And we inform that conversation.”

The reality was that when these companies started to ask questions about what a good corporate citizen relative to racial justice looks like, it came down to a lot of people talking about this big issue without input from organizations like the NAACP, which has done the work for 100-plus years, Owens said.

With its ETF, the trusted voice of the NAACP is now involved in the market.

“It’s a really wonderful innovation for the NAACP because it’s an opportunity to create another way to talk to companies about racial justice,” he said. “And it was coming from more of the investors than just as a national civil rights organization.”

The future of socially conscious ETFs

As socially conscious investing becomes more and more common, Impact Shares is getting requests to launch ETFs covering more of the most pressing “watershed moment” issues of the day, including LGTBQ rights, gun safety and preserving democracy, Owens said.

It’s a moment of all kinds of change.

“Investors are really driving these conversations in a way where corporations have no choice but to pay attention and to understand that it’s not going away.”