Imagine you’re driving. Your partner in the passenger seat says to you, “Oh, looks like you’re driving with your parking brake on.” What do you do? You disengage the brake and have a smoother drive. If you were a new driver, you might ask, “How do I do turn it off?” What you wouldn’t do is say, “I like driving with the brake on.”

Daryn Dodson uses this metaphor to explain how removing bias from investing means greater impact for women and Black and brown communities, as well as greater returns for investors. Dodson is the managing director of Illumen Capital, an investment management firm that is leveraging diversity for the betterment of society and investors.

Dodson’s firm is part of a growing tide of companies offering unique solutions to diversify the investing industry and increase impact investments that target Black, Latinx, Asian, Indigenous, and other communities of color.

Pictured above is the National Memorial for Peace & Justice in Montgomery Alabama. Illumen Capital brings investment managers to this site to learn about the history of racism in the U.S. in an anti-bias workshop. Photo by DiAnna Paulk, 2019.

Disengaging the Bias Brake

In Dodson’s metaphor, the brake is unconscious bias and the car is the returns on investments. Illumen Capital has created a bias-reduction program aimed at reducing racial and gender bias and helping investment managers find and invest in entrepreneurs who have been overlooked and underestimated.

Investors dedicated to socially responsible investing (SRI), or “impact investors,” wake up every day to change the world and make money for investors, he explains. His business bets on the idea that those impact investors will be excited to unlearn their biases when they discover that they’re missing out on impact, and financial returns, by holding unconscious bias.

“We’re helping people remove their blinders to notice and recruit to boards, to their portfolios and to their teams,” Dodson says.

This program includes taking impact investment managers, fund managers, and leading asset owners to the National Memorial for Peace and Justice, also known as the Lynching Memorial, in Montgomery, Alabama. There they take part in an immersive experience, going on listening tours, learning about empathy, and specifically focusing on the Black American experience, says Maria Lopez Rosas, executive assistant at Illumen, who participated in the program in 2020.

The ethos behind this program comes from collaboration with Stanford University psychology professor and researcher Dr. Jennifer Eberhardt and her team. With other Stanford researchers, Dr. Eberhardt and Dodson co-wrote a 2019 peer-reviewed report on the subject. Their study found that top-performing financial managers of color may be most harmed by racial biases.

“In financial services—an industry grounded in the principle of avoiding uncompensated risk—investors are ironically taking on such risk by not investing in more diverse managers, as diverse teams are shown to outperform homogeneous teams,” the paper states. So Illumen set out to fix that.

Illumen’s portfolio of people-of-color- and women-led investments includes startups in health and wellness; education; climate and sustainability; and financial inclusion.

“We had one foundation shift [its total investments] from $50 million in strategy around women and people of color and impact to $1 billion,” Dodson says. “Our insights were one of the critical factors in that shift and transformation of their commitment to the sector, because they realized they could do it in a market driven way. They realized that, without reducing biases, they might miss opportunities.”

Opportunities Down the Line

While Illumen works directly with impact investors interested in reducing bias to deepen their impact and results, other strategies for combating systemic racism have been introduced for investors—be they individuals, foundations, university endowments, or religious organizations.

James Malone, chief financial and diversity officer at Community Capital Management (CCM){GBN} says that just as there was a reckoning with racism in our country amidst COVID and the high-profile murders of numerous Black people in 2020, so too was there a reckoning amidst investors.

“We’ve been investing in low- and moderate-income communities for 20 years and many of the beneficiaries of that capital have been Black and brown individuals, families, and minority communities,” Malone says. “Our investors were looking for a way to be more affirmative in their support for minorities and the BIPOC [Black, Indigenous, People of Color] communities.”

Malone, whose background is in socially responsible investing and impact investing (i.e. investing that targets specific communities and social issues for funding) and has been with CCM for 11 years, was heartened to see this surge in enthusiasm for the work he does. CCM was already putting capital to work benefiting minorities, and after an increased interest by clients, the company created the Minority CARES strategy, which focuses on eight impact themes that target and aim to make a positive impact on minority individuals, businesses, and communities. These themes include affordable health and housing, enterprise development and jobs, education and childcare, and more.

Since creating this layered investing strategy, CCM has raised over $100 million in investments, mostly from banks, foundations, and religious organizations that were looking to specifically support minority communities and diversify their investments.

CCM and Illumen’s strategies represent two ways of financing projects that will uplift Black, Latinx, Asian, and Indigenous people in our society who have been systemically underfunded due to racist policies and bias.

Feeling the Impact

These strategies are proof that the SRI industry is growing—and the numbers back that up. Malone saw 2020 as a tipping point for investors, who became more willing to put more money toward impact investing for Black and brown communities. Investing in Black-owned businesses could have a huge impact, according to a December 2020 report from the Brookings Institute, which showed that if Black-owned businesses matched the population size and revenue matched non-Black businesses’ revenue, the total revenue of Black-owned businesses would increase by $5.9 trillion. There are bound to be more innovations and racial-justice focused investing products as investment managers and entrepreneurs see growing interest from investors.

“All investments are impact investments, but the question is, what are you impacting?” Malone says. “If you’re investing, it does have an impact. But is it the impact you want?” ✺