Future Returns: How to Invest With an Equity Lens | Barron’s Penta

By Abby Schultz | Barron’s PENTA | January 5, 2021

The racial justice protests that enveloped the country for several months last year prompted some individuals to look more closely at how they can use their investment dollars to create a positive impact on racial equity and diversity.

It’s a conversation Tiedemann Advisors in New York began more than a year-and-a-half ago, but that has gained momentum over the past year.

“The level of appetite and interest has grown dramatically,” says Jennifer Ayer, Tiedemann’s co-head of impact investing.

Instead of looking for specific investments to fit racial equity goals, however, the firm’s leadership recognized they needed to understand what types of investments would create the kind of outcomes investors intended, and which opportunities would be true investments versus philanthropy, she says.

“What we needed to do was to use our depth and breadth as researchers and to make the investment in time, human capital, and financial capital to engage with experts to devise a theory of change for this space before we could start to engage with clients,” Ayer says.

That led the firm to look at how investors were able to find strategies for investing that would create a positive impact on the environment—a practice that had begun more than a decade ago. And it led them to work with several consultants with expertise in doing foundational research across complex problems and systems, to zero in on the best approach for an equity-lens investing strategy.

Part of this work has involved reaching out into low-income communities and communities of color, to hear from individuals directly about their experiences. The firm compensated those who spent the time with them to convey their personal stories and struggles. The process was rewarding, if at times difficult. Ayer says it made her realize “all the enormous opportunity the world has constructed for me that I hadn’t seen before.”

Penta recently spoke with Ayer about where this exploration is leading.

Limits of Public Investments

Overall, much of the equity-lens work Tiedemann is doing is focused on U.S. strategies. That’s because systemic racism, racial equity, and social justice issues speak to the story of the U.S.

One way the firm is working with clients is in the public markets, with both passive funds and active ones that are focused on seeking out companies with the best environmental, social, and governance (ESG) practices.

In the public markets, individuals also can seek out companies with diverse boards of directors and corporate executives, and those that have “clear policies to protect and advance successful employees irrespective of background or how they identify,” Ayer wrote in a recent paper titled, “The Opportunity and Challenge of Equity-Lens Investing.”

Over time, these investment decisions, as well as strategies such as shareholder engagement, can shape the market, but these are approaches that will take time to produce results.

“Companies have to respond to shareholder engagement, they have to begin to promote policies and make changes in the companies—it’s powerful, but not immediate,” she says. “The investor is the one who is more immediately getting most of the benefit of that expression of value.”

Facilitating Long-Term Change

Tiedemann is separating out these strategies for investing in public companies from “longer-term patient capital, potentially catalytic capital—work where solving a problem, effecting system change, is really the goal,” Ayer says.

These are investments in vehicles such as private-equity, venture-capital funds, or real assets, that are “longer term, potentially higher-risk, higher return,” and that potentially, in some cases, offer little in investment return.

“There are times when clients are considering whether or not they want to prioritize the impact first,” she says.

In the private capital sector, Tiedemann is specifically focusing on seeking out investments that will perpetuate the creation of wealth in communities that have historically been low-income communities of color.

The idea is to make investments that are not “fully extracted from these communities, but rather are supporting them—not only to have economic stability and upside potential, but a likelihood of keeping the wealth in the community,” Ayer says. The point is to share a seat at the table in a way that allows communities to thrive, create wealth, and then to pass that wealth on to their families.

“That’s a key goal—that’s driving where our research is going,” she says. It means backing investment managers of color, and entrepreneurs of color, and “making sure these funds are structured in a way that benefits those who are doing the work and who are in those communities, and not prioritizing the [limited partner] or investor.”

Looking Internally, Too

Some clients curious about what they should be doing to invest with an equity lens are also asking Tiedemann about their own racial equity practices.

Others may bring ideas for equity investment in their local communities, often to get Tiedemann’s assessment. But sometimes they’ll say, “we’re going to do this and we think you should too,” Ayer says.

Clients are also interested in whether the firm is using the same equity lens when it assesses all of its managers—not just its impact investing managers, or ones that have been brought in recently.

Tiedemann has begun a process of examining the firms that run the funds it invests in and has found many do have good practices in place. More importantly, the questions they are asking signals to these managers that Tiedemann is serious about diversity, equity, and inclusion (DEI).

“It’s one more proof point for them that this is how the industry is going,” Ayer says. “Being institutional in size, we can make a difference.”

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