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How Financial Markets Can Impact Social Justice

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During these weeks of ongoing social unrest and protests, in the wake of the killing of George Floyd and amid calls for greater social justice, the U.S. stock markets continued to climb, to the dismay of many. The recent momentary pullback in stocks was concern over a second wave of Covid-19 cases and fears over how the process of reopening state economies could be stalled or reversed, not social justice.

The markets’ failure to respond to the protests presents evidence of systemic racism on the part of predominantly male white market players. This realization debunks the assumption that U.S. stock markets do not respond to social unrest, as Fox News presented on air and later apologized for amid harsh criticism. No response by the markets is a response. The market can no longer get away with having “no conscience,” as CNBC’s Jim Cramer suggested.

The long-standing view of financial markets must change, acknowledging their central role within a socioeconomic system that is systemically racist. We need to ask ourselves what causes the U.S. economic and financial systems to suppress the voices of people of color. A system must be created that penalizes corporations for being socially unjust and hits them where it hurts: in their stock prices.

Ideological Framework for Social Injustices

It is difficult to understand or explain institutionalized racism using only the framework of neoclassical economics because that model assumes all agents are maximizing their behavior. Systemic racism, however, means they are not doing so. A simple example is discrimination, which eliminates an entire pool of candidates and, therefore, undermines efforts to hire the best people.

The bigger issue is that ideologies are social, not economic, constructs. As Nobel laureate Joseph Stiglitz and Karla Hoff of the World Bank wrote, “The infinite set of potentially observable data and the infinite ways in which that data could be processed are limited by the finite set of socially constructed categories that are a part of what are called ideologies.”

Ideologies are best thought of as higher order belief systems that effect perceptions; in turn, perceptions affect economic choices. As Robin DiAngelo wrote in White Fragility, ideologies are “the frameworks through which we are taught to represent, interpret, understand, and make sense of social existence.”

White ideologies embedded in the American economy dominate. As DiAngelo discusses, “These ideologies make it very difficult for white people to explore the collective aspects of the white experience.” They create a situation in which whites have a difficult time in viewing themselves racially.

The ideologies that infect the nuts and bolts of our economic system are also what cause systemic racism to persist. Since financial markets are at the heart of a capitalistic system, they are also implicated.

Markets as a Reflection of Society

Financial markets reflect the society in which they exist. If our social structure promotes systemic racism, so do financial markets. Data bear this out. Less than 3 percent of senior-level management positions in the financial services industry are Black and only 6 percent in overall management positions. Less than 3 percent of portfolio managers in the asset management sector are Black. Financial professionals from minority groups owned 9 percent of hedge funds in 2017, which accounted for less that 1 percent of assets under management.

Other evidence of racial injustice in the financial markets can be found simply by looking at the level of participation in the markets by African Americans. Only 34 percent of Black households have a retirement account, compared to 60 percent of white households. Moreover, around 50 percent of Black households do not have bank accounts or are underbanked because they do not have enough money to meet minimum balance requirements.

The Role of ESG

A framework exists that may provide a start: environmental, social, and governance (ESG) investing. To be effective in promoting social justice, however, ESG factors for investing will need to be extended to include some measure of a company’s social awareness. A metric for racial justice has been proposed by OpenInvest, a registered investment advisor that lets clients customize their ESG portfolio around specific issues, but this is not widely employed yet.

Otherwise, we must rely on what we observe as companies examine everything from hiring and promotion practices to marketing. For example, PepsiCo PEP just announced it would retire its Aunt Jemima brand of food products because of brand imagery with origins in racist stereotypes.

What Leaders Can Do

Today, business leaders in every industry are speaking out against racism and making pledges to support racial equality. Goldman Sachs GSBD CEO David Solomon, for example, issued a statement urging employees to “check in with each other and be willing to have conversations that may take us outside of our comfort zone.” While personal awareness of racism and biases is a good start, it is not enough. Ideologies must be overcome by organizations.

Business leaders need to understand that the question is not whether individuals in their organizations are overtly racist, but how, not if, their organizations perpetuate implicit systemic racism. Otherwise, there will not be much progress in overhauling a system to make it more accessible, fair, and equitable.