Impact Investing in Black Economic Mobility

In recent decades, institutional investors have expanded the criteria they consider when evaluating investment opportunities. Environmental, social and governance (ESG) contributions have become a regular part of the conversation for traditional investors. Meanwhile, impact investing – which seeks not only to achieve measurable ESG benefits, but also to generate attractive financial returns – has the potential to unleash a growing wave of funding for innovative companies aligned with this mission.

The convergence of several major factors—from climate change to a reassessment of the responsibility of the private sector to society as a whole—has prompted investors to weave broader considerations into their strategies and decision-making. A recent McKinsey study on ESG and impact investing found that the majority of investors now consider ESG factors as part of their investment and portfolio management decisions (Exhibit 1).

More than 50 percent of limited partners (LPs) currently allocate capital to impact funds that aim to generate measurable ESG benefits in addition to attractive financial returns (Exhibit 2). Almost the same percentage indicated that they had not invested in these funds but would consider doing so in the future. About a fifth reported being pressured to invest in impact funds by capital contributors; only 12 percent expect to receive a higher return from these investments.

More than half of limited partners allocate capital to impact funds;  those who do not are considering doing so in the future.

The rise in interest in ESG and impact investing is linked to the elevation of black economic mobility as an important issue for both society and business. Economic mobility—and by extension the experience of black Americans—is a critical component of S in ESG.

The racial reckoning of 2020 and the tragic consequences of the COVID-19 pandemic have both illuminated and exacerbated these inequalities. In response to these crises, private equity investors began to prioritize investment opportunities to promote the inclusion and economic mobility of Black Americans. To date, American investors have committed more than $350 billion to this cause.

However, private equity investors face three major obstacles to successfully investing in black economic mobility: a gap between the capital committed and the capital needed; a small number of funds founded, owned and managed by blacks; and lack of clearly identified impact investing themes.

To better understand the investment landscape in support of black economic mobility, we used several sources. We surveyed 100 equity and venture capital funds, institutional investors and impact investors in August 2022 to gain visibility into prevailing perceptions of ESG and impact investing and how trends may evolve in the future. We also collected and analyzed data on existing racial disparities affecting the black population and explored potential investment opportunities to address them.

Our analysis identified eight socioeconomic pillars that represent the areas with the greatest potential to move the needle on black economic mobility: affordable housing, pre-K-12 education, health equity, financial inclusion, business ownership, workforce training and employment, the digital divide and public infrastructure. These pillars could also offer investors favorable market returns.

We hope that by highlighting the wide range of investment opportunities, this report provides investors with a road map to increase their financial support and engagement in the fight for black economic mobility.

Investors have a unique opportunity to uplift black communities, minority- and women-owned businesses, and the country as a whole. They must not let this moment pass without concerted action.

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