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Investors Have Power to Change Board's Policies on Race: Morningstar Experts

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What role should investors play in the struggle against systemic racism?

It’s a question that advisors may want to consider especially if their clients are concerned about owning assets that don’t perpetuate the status quo.

“Investors have the means to drive change,” writes Jon Hale, head of sustainability research at Morningstar, in a recent blog. “An all-out attack on systemic racism requires every tool in the box.”

Among those tools: investing in sustainable investments, including ESG- and impact-focused mutual funds and ETFs, and investing with asset managers who engage with companies on diversity and inclusion issues by either sponsoring or supporting shareholder proxy resolutions that address those issues.

“Fund investors need to take a close look at their funds’ voting records around discrimination and inequality and call for stronger alignment between recent statements and proxy votes,” writes Jackie Cook, Morningstar’s director of sustainability stewardship research, director of sustainability stewardship research, in another blog.

Her research of 34 shareholder resolutions on diversity and racial and gender discrimination this year shows that corporate boards, which tend to heavily influence votes by asset managers, opposed all the resolutions, and few votes garnered 30% or more of approval — the minimum that typically catches the attention of management, according to Cook. The votes that did receive 30% or more approval involved gender pay equity rather than pay equity based on race or other racial diversity issues.

This year’s shareholders resolutions, however, were filed before the latest police killings of African-Americans and the national protests that followed. Executives at several leading financial firms including BlackRock, J.P. Morgan, Wells Fargo and Citigroup subsequently denounced racism. 

“Asset managers wield so much power and influence and have a very important role to play,” says Cook, adding that their role includes not just shareholder resolution votes but also direct engagement with companies.

Next year’s resolutions along with engagement priorities of asset managers “will be very interesting,” Cook tells ThinkAdvisor. In addition to more resolutions on racial diversity and inclusivity she also expects a focus on workplace practices during the COVID-19 pandemic, including executive pay at companies that laid off workers.

“You can bet that sustainable investors will closely question what corporations are doing to fight systemic racism,” writes Hale.

Referring to sustainable workplace issues, Cook notes that “you can have diversity but still have discrimination,” including discriminatory practices in companies’ interactions with communities such as higher loan rates based on borrowers’ race rather than their credit rating.

She recommends that advisors “get comfortable talking about all of these issues,” which can help link clients’ investments to their long-term goals beyond long-term returns.


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