Ever since the June 29 Supreme Court ruling against affirmative action in universities, various sectors have been concerned about the implications to their work, from corporations concerned about supplier diversity initiatives to investors and grantmakers who have made particular efforts to support emerging fund managers and diverse entrepreneurs. And yet, as the LA Times reported, this decision “does not close the door to giving applicants extra consideration if they have suffered bias, discrimination or hardships.”
Such suffering certainly applies to many underrepresented entrepreneurs. So what are investors to do as we all seek to interpret this ruling? How can we support a racial equity agenda in an environment where it’s increasingly difficult to even talk about race?
When the University of California dropped race as an explicit criterion for admissions, NPR reported that enrollment by Black and Latinx students dropped by 40% at UCLA and UC Berkeley. Excluding race from the conversation can have dire consequences on outcomes not just for communities of color, but also for everyone who benefits from our engagement in diverse spaces (I say this from my perspective as a white person).
The good news is, we don’t have to. But we do have to be smart about it, and work within the evolving boundaries of the law.
“Programs designed to target the effects of discrimination or benefit populations that are under-resourced are appropriate,” but “what the Supreme Court said you are not allowed to do in higher education, and which [litigants are] trying to extend to other contexts, is make decisions based solely on someone’s membership in a particular racial group,” Emily DeSmedt, an partner at Morgan, Lewis & Bockius said in a recent presentation. She later added, “This challenges us to be clearer on the why, which is to correct past wrongs as well as being clearer on the challenges different groups have faced.”
I cannot provide any legal advice and would always recommend people seek counsel for their particular situations. My perspective is that of an impact investor grappling with our new reality, not that of a lawyer. And this is now especially a field where good legal advice is essential.
To start the conversation, here are three approaches to consider in seeking to advance a racial justice agenda through investments:
1. Race Can Be Considered In Remedying Past, Specific Harms
As law firm Akin explained, “In the Harvard Opinion, the Court began its analysis by explaining that, outside the context of higher education, only two interests have been found sufficiently compelling to justify racial classifications: (i) remedying specific, identified instances of past unlawful discrimination; and (ii) avoiding imminent and serious risk to human safety in prisons (race riots).” In this particular case, “Harvard and UNC did not seek to justify their affirmative action programs based on evidence of their own past discrimination.” But others certainly could. And you know who, as the court noted, has extensively documented “specific, identified instances of past unlawful discrimination”?
Far too many financial institutions.
Banks are infamous for their horrific impact on people of color over the centuries. According to the Washington Post, JP Morgan’s predecessor banks accepted enslaved human beings as collateral. On the other side of the Atlantic, the Guardian reported that many major banks reaped huge returns from financing colonialism and insuring ships carrying enslaved people from Africa to the Americas. Redlining, for decades, denied loans to people based on race and location. Even when those policies waned, Black homeowners have been lowballed and denied capital; stories that come up time and again in local news organizations like LA Times and ABC 7.
This history can be concretely tied to discrimination and had the compounding effect of denying people the equal opportunity to accumulate wealth over generations. And unlike many industries, banks have transaction-by-transaction data verifying this going back hundreds of years.
The outcomes in finance across the board are also stark in terms of their lack of diversity. As Dennis Price noted in Impact Alpha, “In asset management, white men manage 98.6% of $82 trillion of assets nationwide, a percentage that hasn’t budged in decades.” CrunchBase found that in 2022, Black founders raised just 1% of venture capital money despite being roughly 14% of the US population. Similarly, according to Reuters just 0.39% of venture capital went to women of color in 2022 despite the demographic comprising more than 20% of the US population.
How do we fix this? The Supreme Court additionally noted that a specific remedy to past harms also needed to be time-bound or otherwise goal-oriented. Here’s one goal to suggest: What if financial firms, as a baseline, aspirational goal, simply needed to match the racial demographics of their area of work?
As McKinsey noted, three quarters of venture capital is deployed in just three regions: Northern California, Southern California and the Boston-NYC-Washington corridor. According to census data, these three regions are all anchored by cities with at least 60% people of color. A reasonable goal could be for financial institutions to take the next ten years and fund enough diverse entrepreneurs to get their stats to even remotely align with US demographics. How they implement this aspirational goal must comport with the law, but there are mechanisms to do so.
This wouldn’t imply privileging entrepreneurs of color – it would be a sort of market correction to help us simply set a level playing field in the future, following the standard definition of racial equity as when race can no longer be used to predict life (or investment) outcomes. And as DeSmedt additionally noted, “When an organization makes a race-based decision to address the effects of its own discrimination – so an organization identifies discrimination to which it contributed and then makes those decisions to correct that, the court held that that was a sufficiently compelling interest that may justify race-exclusive decisions.”
If this approach were to be invoked, it could also mean financial institutions looking back to truly assess and name the direct harms they have perpetrated on communities of color. That in itself would be a significant win for communities that have often struggled for a simple recognition of the past. And in the absence of self-assessment by institutions, present-day entrepreneurs who can demonstrate their own instances of discrimination should be able to point to both past and current practices.
2. We Can Continue To Invest In The Entrepreneurs That Seek Strong Financial Outcomes And Best Serve Diverse Communities
I am a social investor, meaning I always try to take into account the social and environmental impacts of the investments I make. But let us say I was purely a financial investor, and, additionally, completely race-blind in my decision-making. I still might make sure that diversity in all its breadth is an important criterion, taking the following factors into account in my investing:
If companies and funds statistically do better under diverse management, it could be considered a furtherance of fiduciary duty to consider the diversity of leadership in the usual course of due diligence and in compliance with legal rules.
Additionally, it’s reasonable to include lived experience as a diligence criterion. As we’ve always said at Candide Group, our priority is to close the racial wealth gap and ensure a prosperous future for people from all ethnic backgrounds, gender identities, geographic areas, and sexual orientations. In pursuing this goal, we tend to find that those with lived experience in the communities they choose to serve are likely to be the best entrepreneurs or fund managers for the task.
As a result, this means that the demographics of those we invest with are much more likely to match the demographics of the communities we serve. If lived experience is still deemed a legal criterion, as it is an individual characteristic with many factors, including socio-economic background and geography, then it would remain reasonable under the law to seek people who know their target market and thus serve it well.
3. Underrepresented Entrepreneurs Have Faced Exclusion From Capital Markets, Informing Their Individual Experience
Chief Justice Roberts, in his majority opinion, was clear that individuals should be evaluated based on their particular lived experience, noted that “nothing in this opinion should be construed as prohibiting universities from considering an applicant’s discussion of how race affected his or her life, be it through discrimination, inspiration, or otherwise.”
The same theory can be applied to entrepreneurs. Many diverse entrepreneurs have indeed shown the sort of grit and determination required for entrepreneurship simply by persisting despite very real and obvious racial discrimination against entrepreneurs of color. For instance, data from the Federal Reserve and Minority Business Development Agency found that business owners of color received less capital at higher interest rates, essentially having to find ways to consistently do more with less. If such grit is a reasonable criterion for choosing an entrepreneur to back, then this would appear to fit within the framework of evaluating individuals for their particular experience.
This is not just about overcoming hardship but also about bringing unique skills and perspectives. The Stanford Social Innovation Review explains, “…The ways people of color have experienced the world up to this point can affect how they lead. This goes beyond experiences of oppression or historic marginalization to include the connection, meaning, and joy these leaders can draw on from their respective cultures and communities. As a result, there are assets and skills many leaders of color develop and excel at because of the experiences and perspective their identity brings.” If we are open to recognizing the very unique, individual skill sets people of diverse backgrounds bring to the table, this is also part of the story that leads us to invest in diverse entrepreneurs.
What We Need In This Moment: Less Fear, More Courageous Capital
I fully understand some investors’ fear, given that having a legal defense ready to go doesn’t prevent them from being sued or worse. Political actors and corporations have long used lawsuits as scare tactics, as evidenced by the over 350 lawsuits documented by the Business and Human Rights Centre filed with the goal of silencing activists. (I can personally attest — having been sued for $55M in a ludicrous, time-wasting lawsuit from private prison company CoreCivic; for saying a very simple statement the courts ultimately deemed correct: “prisons separate families.”)
And while the first lawsuits have indeed come down—for instance, challenging the Fearless Fund’s programs for Black women–it’s been encouraging to see that according to their CEO Arian Simone, their funders, including major financial players like Bank of America and JPMorgan Chase, are continuing to support them publicly.
“Rather than backing away and thinking, ‘I can’t do anything with racial equity or justice,’ sit down and consider policies to implement your ideals,” generally noted Courtney Nowell of Morgan Lewis. “Our work doesn’t end; it just keeps up with the times.” The MacArthur Foundation’s General Counsel Joshua Mintz equally noted in a recent post, “Progress has always been marred by setbacks, but those committed to social and racial justice are not dissuaded from continuing the quest. And we will not be dissuaded now.”
I do believe that the truth can set us free, and that it’s worth staring down challenges to fight the good fight. There is much work to do to build a more equitable society for all. And the truth is, if we want to end the racial wealth gap, we will have to keep talking about race.
Full disclosures related to my work available here. This post does not constitute investment, tax, or legal advice, and the author is not responsible for any actions taken based on the information provided herein. Certain information referenced in this article is provided via third-party sources and while such information is believed to be reliable, the author and Candide Group assume no responsibility for such information.
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