How To ‘De-carcerate’ A Portfolio

June 16, 2020

Rachel RobasciottiAmid growing awareness of police brutality, economic racism and systemic racial injustices, Americans are taking a closer look at how their actions support racial inequality. That includes their investment decisions. (Read: "ETFs Holding Guns, Opioids & Prisons.")

But investing for racial justice goes well beyond just divesting from prison operators such as GEO Group (GEO) and CoreCivic (CXW), says Rachel Robasciotti, principal and wealth manager of San Francisco-based Robasciotti & Philipson.

It requires a holistic approach to portfolio construction, one that interrogates how companies' business activities support and maintain systemic inequalities throughout the economy and society.

Since Robasciotti & Philipson's inception 13 years ago, the firm has been on the forefront of social justice investing, including the movement to divest from mass incarceration. A few weeks ago, Robasciotti published on the company's blog a detailed list of more than 100 stocks excluded from its portfolios for not meeting its racial justice screens. spoke with Robasciotti about these screens as well as about racial justice investing in general, including why investing in “diverse” companies isn't enough; how racial justice screening impacts the risk/return profile of a portfolio; and why divesting from Amazon can be more impactful than boycotting Amazon's services. What sort of client conversations are you having right now about the issue of racial equity in general?
Rachel Robasciotti: In my experience, clients really started focusing more on racial justice after the events in Ferguson in 2014. And there's been sustained interest; for a lot of the people who became aware of systemic racial injustice, that stayed important to them, and they continued talking to us as investment managers about the importance of racial justice.

But for many who are beginning to pay attention to racial justice, this might be a new thing. For them, broadly, the conversation seems to be about: "What can we do?"

I've seen a lot of very quick solutions offered by people whose hearts are in the right place, but who haven’t been deeply embedded in communities committed to racial justice, and those aren't necessarily the answers we need.

The answers we need in the investing world come from those of us who've been deeply embedded. They look like us publishing the exclusion list that we use for racial justice, for example. Let's step back a second. Can you clarify what you mean by "quick solutions"?
Robasciotti: Sure. So one thing you don't see in our racial justice exclusion list is something specifically based on diversity, such as the diversity policies and practices of publicly traded companies.

The reason is that we've tracked this issue for years, and we know that the data available about racial diversity and compensation relative to that is vastly incomplete. There's data available through various sources—Bloomberg, MSCI—but it's incomplete data, at best. It doesn't do a good job of actually addressing the systemic inequities that occur as a result of racism in our country.

We've focused on the real ways in which capitalism has chosen to profit off systemically unjust practices, like mass incarceration, and on what organizations like Color of Change, the Movement for Black Lives and many others are telling us that we should be targeting as investors. On your exclusion list, you have more than 100 stocks that you choose not to invest clients in, because the companies engage in one or more business practices that exacerbate racial inequality. These include prison involvement, money bail involvement, surveillance, immigrant detention, for-profit colleges and occupied territories. Can you tell the readers about why you chose these screens?
Robasciotti: The first, “prison involvement,” is obviously prisons. And that's not just CoreCivic and Geo Group; we've also excluded companies providing financing, because they're critical to those companies doing business, and we've excluded their major suppliers.

“Money bail involvement” includes the publicly traded companies underwriting the insurance policies that money bail relies upon. The money bail system is a feeder into the prison system and part of mass incarceration, which unfairly and unjustly targets black people in the United States, and other communities of color.

“Surveillance” is also a lead-in to the overall system of mass incarceration, as it happens in a way that disadvantages black people. If you're over-surveilled, then you can be jailed and not let out until you come up with a certain amount of money that you don't necessarily have, because you're from an economically disadvantaged community—and your chances of winning your case is lower, or settling for a lower charge is higher, so you end up in the prison system. It's all intimately connected and intertwined.

There's also often an overlap with “immigrant detention”—the same companies engaged in prison involvement are often involved in immigrant detention, which we know has been responsible for all sorts of atrocities, including separating children from their families. They're all part of a network of activities that make mass incarceration a profitable activity.

The states frequently have contracts with these private prisons as well, stating they must fulfill on a certain level of capacity and creating additional incentives for states to fill those prisons. Given the way our world is set up right now, they're more likely to fill them up with black bodies than anybody else.

So they are all part of a network of activities that make mass incarceration a profitable activity. On your exclusions list are two interesting factors I haven't seen on many other ESG exclusions lists: For-profit colleges and occupations. Why not invest in for-profit colleges?
Robasciotti: We're very supportive of higher education in general. However, the Project on Predatory Student Lending and many other organizations have concluded that for-profit colleges specifically target low-income students, specifically people of color, single parents and veterans. I can tell you that as a child, I witnessed this happen with my mother, who's a black woman and dyslexic.

There's no assessment program for these colleges similar to community college; for example, in California, an assessment process is required, so that people aren't taking classes that they will fail. The students are left with mountains of debt without the means to pay for it.

While for-profit colleges account for 13% of the student population, they're 33% of federal loan defaults. And these loan defaults are something that stays on an individual's record and persists past filing for bankruptcy as well. The scar follows those folks forever. The exclusions we've talked about focus on U.S. racial inequities, but then you have a huge portion of excluded stocks under "occupied territories" that is almost entirely Israeli stocks. Why?
Robasciotti: To be perfectly clear, we do take a global outlook, and it's necessary for us to apply our lens on justice worldwide.

In the occupied West Bank, Palestinians are subject to Israeli military law, but Israelis living in the Jewish-only settlements are subject to Israel civilian law. Human Rights Watch called that a two-tiered system that was “separate but unequal," which reminds us of the U.S. legal doctrine that allowed racial segregation to flourish under Jim Crow in the U.S, and added that Israel also gives preferential services, development and benefits for Jewish settlers, while imposing harsh conditions on Palestinians.

So it's important that if we're standing up for justice here, we must also stand in solidarity with our brothers and sisters across the world experiencing similar injustices. The same call for justice doesn't change based on the borders that surround your country. Are there plans to do the same breakdown of other countries? China, for example, enacts a number of human rights abuses on its citizens.
Robasciotti: We continue to conduct research and work with our social justice partners to ensure our list and our screens are reflecting the insights of those movements in an ongoing way. As those movements identify areas where racial justice is occurring, we're adding them. This is not a one-and-done type of list; we'll continue to update it over time. On your list are a number of large investment banks (and ETF issuers), including BlackRock, State Street, Schwab, Invesco and Northern Trust. Could you elaborate why they're on the list?
Robasciotti: They own shares [of the other excluded stocks]. We added to the list investment companies that owned more than 1 million shares. There's this ethos within finance that passive investing is neutral, but there is no neutrality when it comes to investing in a system that disproportionately cages black and brown people. So let's say we go through and screen out all the stocks on this list. What sort of impact does that have on the risk/return profile of the remainder of the portfolio? Does it add in certain tilts, and do you have to adjust for that somehow?
Robasciotti: We start with a very broad, global, all-cap investment universe. Applying these social justice factors does make the universe smaller—but instead of dealing with thousands of companies, now you're dealing with multiple hundreds of companies. There's still an opportunity to optimize your portfolio based on certain factors that bring you back in line with, say, global market capitalization or average P/E ratios.

So after our screening, we use an optimization process to make sure that we're delivering the returns of the asset classes and sectors we originally started with, because you can very easily get a tech-heavy and growth-heavy portfolio. That's not what we want! We want to leverage our investment power, but we only have that power if we actually deliver respectable financial returns and respectable social returns at the same time. One of the counterarguments against ESG investing is that you can have these exclusionary screens in place, but if you're still patronizing the companies in other ways, you're negating the good you might be doing with your investment dollar. The example I usually hear is Amazon (AMZN): You can choose not to invest your dollars in Amazon, but if you still buy something off Amazon, then you're negating the good you might have done. What do you say to that argument?
Robasciotti: I think the actions we take as investors have a certain weightiness to them, given that race in the U.S. continues to come from an economic basis. Because corporations have for so long made their primary responsibility to their shareholders, I believe their ears are still trained to listen to the voice of their shareholders.

We as shareholders are more listened to by corporations than many other stakeholders, so I feel like it's our responsibility—and we can have greater effectiveness—at having these companies pay attention.

I've just seen too many cases where consumer outcry has done very little, but when you finally get to the investors doing something, suddenly the companies pay attention.

So yes, it's possible you're undoing your divestment from Amazon by using Amazon services as a consumer. But in reality, which of those actions is Amazon paying more attention to? Should investors concentrate their efforts on shareholder activism, too?
Robasciotti: There are folks who do that, though that's not something we engage in. One of the complications with shareholder activism is that resolutions are nonbinding for corporations. So even if you get a resolution with a high percentage, the corporation doesn't necessarily have to take it. And even if the corporation does choose to act, their actual implementation of the action that they've promised can often be lagging.

There's a larger difference that can be made by investors acting in unison to divest, especially from these companies that are a part of these systems that extract from the black community, specifically. There's more opportunity for change.

Contact Lara Crigger at [email protected]

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