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For decades, investors have looked for ways to use their investments to drive positive change through an approach known as impact investing. In recent years, this approach has led investors to specifically look at how they can help Black, Indigenous and People of Color (BIPOC) communities, in part brought on by the transformative events that shaped 2020.

Addressing the racial injustice and inequality experienced by BIPOC individuals and communities will require comprehensive efforts.

According to author Shawn Rochester, Black Americans have $8.3 trillion less wealth than they would if wealth were equally distributed, regardless of race. In his book The Black Tax: The Cost of Being Black in America, Rochester says Black Americans have $1.5 trillion less in retirement assets, $2 trillion less in business equity and $4.8 trillion less in primary home equity.

Ronald Homer, chief strategist of impact investing at RBC Global Asset Management, says investors are waking up to these issues and using their investment dollars to bring about change. He describes how investors are increasingly using impact investing to support companies and funds that contribute to the upward economic mobility for BIPOC individuals.

What is impact investing, and how can it support BIPOC communities?

Impact investing is a way to pursue competitive financial returns while also achieving measurable social impacts aligned with your values and interests. According to the Global Impact Investing Network, the impact-investing market ballooned to $715 billion in April 2020. That's a 42 percent increase from 2019.

“It's about increasing the flow of capital into underserved communities in areas such as homeownership, affordable housing and small business development,” says Homer, who is also the head and founder of the RBC Access Capital Community Investment Fund.

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Many funds aims to provide the “double bottom line” benefit of aiding underserved BIPOC communities while earning a market rate of return. Examples could include providing renovated and affordable rental housing in communities with large BIPOC populations, or supporting small businesses with Black ownership or located in Black neighborhoods.

How is impact investing unique?

Impact investing is different from other types of responsible investing, explains Kent McClanahan, vice president of responsible investing, global investments and trading at RBC Wealth Management-U.S.

For example, it's not the same as socially responsible investing, which involves negatively or positively screening companies or products from a portfolio based on their business characteristics. McClanahan cites an example of someone choosing to exclude a fund that holds tobacco or fossil fuel companies as a negative screen, while a positive one is including companies that take action on racial or gender diversity.

There's also environmental, social and governance (ESG) investing, where investors seek out companies that are doing better than their peers on material ESG factors, such as reducing their carbon footprint or having more women on their board.

Impact investing is more specific to investing in companies, organizations and funds that have a goal of generating measurable, beneficial social or environmental impacts, as well as a financial return, McClanahan says.

How to use impact investing to do good

For investors interested in using impact investing to support BIPOC communities, McClanahan suggests first spending time thinking about the impact they want to have with their investment dollars.

“Do you want it to get families into homes? Do you want it to be small business-related? Do you want it to be invested locally in your own neighborhood? Or globally?” he asks, adding that having this awareness will help investors narrow down the areas of focus for their investments.

“Doing good and investing can align,” McClanahan says. “A lot of people don't think about it this way when it comes to their investment portfolios.”

Another consideration, McClanahan explains, is the type of impact investment product investors want, such as fixed income, where the impact may be more direct, or equities, where the impact will be a bit more general.

“Generally, with fixed income, you know what the proceeds of the bond are being used for. You can go out and buy a low-income housing loan or a small business loan. Or you can buy a bond that's being used to build a solar farm,” McClanahan says. “With equity, you don't know what the money you're investing is used for. And, unless you're buying a new offering, the money doesn't go directly to the company.”

McClanahan also notes that larger companies have many different lines of business: “One may have attractive impact metrics, while the other business line has poor impact metrics. It's tough to know exactly what you're getting with equity.”

McClanahan recommends looking into each investment product to see what the measurable impact is. For example, is it dollars invested to support BIPOC businesses or the number of homes built in a community?

Lastly, McClanahan encourages investors to be patient with what is still an emerging investment alternative.

Many investors interested in sustainability already have some form of impact investing in their portfolios, explains McClanahan.

“You're already doing good and you can build on that with more specific impact investing,” he adds.

Screening processes do not assure a profit or protect against loss. Like any type of investing, ESG and impact investing involve risks, including possible loss of principal.

RBC Global Asset Management is an affiliate of RBC Wealth Management.