Beyond Pledges: Building More Inclusive Capital Ecosystems

The murder of George Floyd at the hands of Minneapolis police three and a half years ago ignited a months-long period of mass social mobilization and intense public engagement. The widespread moral outrage also unleashed a torrent of financial pledges, which McKinsey has estimated to total $340 billion—all in the name of racial equity.

But in the time since, concrete evidence of tangible progress generated by all that pledged capital remains unclear. One reason for this outcome: most efforts fail to address the systems that reproduce inequality. We can—and must—do better.

How Current Capital Systems Reinforce Inequality

Foundations, philanthropists, and impact investors can do better by bridging gaps in crucial areas with flexible and patient…capital.

To be sure, given that the need for investment far outweighs even the capital that has been made available, finding strands of progress amidst such a vast sea of need is bound to involve disappointment. Yet an even more fundamental dynamic is at play: adhering to our existing capital systems, as so much of that pledged funding does, ultimately creates a mismatch between the scale of investment and impact.

Additionally, many pledges leaned into singular approaches, such as a fund focused on housing or organizations led by founders of color, neglecting to consider the more holistic transformation that racial justice requires. These persistent disconnects are embedded systemically in ways that have very real—and disappointing—consequences.

Foundations, philanthropists, and impact investors can do better by bridging gaps in crucial areas with flexible and patient (long-term and low-cost) capital. Critically, this is an area that requires limited guesswork: we know pathways of capital investment that can begin to dismantle systems that reproduce inequality and, in doing so, achieve lasting change.

They must be put to use—right now.

The $10 Trillion Racial Wealth Gap

Racial inequities in the United States are deeply embedded, leading to pronounced disadvantages for Black, Native, and Latinx Americans. These inequities have had multigenerational impacts on the health, economic opportunity, education, and culture of millions of people.

Those compounded impacts are starkly apparent. The net worth of a typical White family is nearly eight times that of the median Black family and five times that of a Latinx family. On a national scale, Black and Latinx households each hold less than 3 percent of the wealth in the United States, even though they account for 15.6 percent and 10.9 percent of the population, respectively.

All told, this “racial wealth gap” in the United States totals more than $10 trillion. Over the long term, our ultimate goal can only be racial equity—a future state where race no longer factors into or determines one’s outcomes. Every community deserves fair access to the opportunity that enables wealth creation and the ripple effect of compounding benefits such wealth offers.

Advancing Economic Inclusion

Traditional financial institutions can play an important role in advancing economic inclusion. However, discriminatory practices continue to plague the US banking system—a system that deliberately excluded people of color for centuries and in the mid-20th century was deeply implicated in redlining, a practice that systemically denied communities of color fair credit and investment access.

Even as the slow wheels of policy change grind away to address discrimination in the banking system through modernizing the Community Reinvestment Act (along with other initiatives), allocators of philanthropic and impact investment capital can use tools they have at their disposal right now to change the field. These include using philanthropic and impact investment dollars to increase access to banks and wraparound services, and build access to credit and financing.

Financial institutions deepen economic inclusion when they infuse their work with cultural competency that builds trust among stakeholders.

Here, it is important to recognize the vital role that access to financial products and services—everything from opening a bank account to building credit or accessing loans—plays in the economy. Black, Latinx, and Native Americans are often underserved by traditional financial institutions. Without adequate access to loans and credit, people’s dependency on high-interest—often predatory—financial services, like check cashing counters and payday lenders, increases markedly.

The priority need for banking access and wraparound services—including services that build financial literacy—is abundantly clear: Native households are the most highly unbanked demographic in the country (16 percent of households), followed by Black households (14 percent) and Latinx households (12 percent). Since 2010, the number of banks in majority-Black neighborhoods has dropped at a rate that far outpaces declines in other neighborhoods around the country.

In addition to providing sufficient access and services, financial institutions deepen economic inclusion when they infuse their work with cultural competency that builds trust among stakeholders. Because different cultures bring different perspectives to financial knowledge and management, culturally informed approaches are critical. After all, financial institutions that understand their clients’ backgrounds can more effectively respond to their needs.

A second primary objective within the umbrella of economic inclusion centers on the need to build credit. Credit history is a key determinant of credit scores, which are then used to get approval for financial products like credit cards and loans.

And yet, too frequently, families of color are excluded from the credit-building cycle altogether. Black and Latinx people—especially those in low-income neighborhoods—are statistically more likely to be among the 26 million “credit invisible” Americans, meaning they have no credit history with any nationwide reporting agencies.

Philanthropy and impact investors can make a difference. They hold the power to drive change by filling critical gaps that other capital allocators do not, including:

1. Moving money to more inclusive banks (such as minority depository institutions or community development financial institutions), which can leverage the assets to increase lending and services to underserved communities.
2. Investing more of their return-seeking assets for impact and using their banking relationships to advocate for inclusive practices that increase access to non-extractive financial products and services
3. Scaling alternative delivery channels and lending models, including those that focus on credit building and innovative credit models to improve accuracy and inclusivity

Grameen America, a leading microfinance nonprofit, offers a superb example by operating an alternative lending model that prioritizes credit building. Working primarily with low-income women of color, Grameen helps them build businesses by providing access to affordable credit, resources, and financial education. A core focus of its program is bridging the credit gap. Grameen helps its borrowers achieve a strong credit history by reporting their microloan repayments to credit bureaus. Typically, women without a prior credit history achieve an average score of 640 within six months of joining the program.

Of course, Grameen is but one example. The vast need demands that these economic inclusion principles be infused more broadly. Imagine the transformative potential of such credit-strengthening work deployed for historically marginalized communities as the default rather than the exception.

Seeding and Scaling Economic Empowerment

Increasing economic empowerment by historically marginalized groups—growing hand in hand with increased community power more broadly—will drive many positive impacts. It will improve lives by supporting everything from more desirable housing options to stronger education and better health.

We know homes, land, and business ownership are highly important vehicles of economic empowerment. People of color are less likely to receive the financing that opens the doors to asset ownership, and they are also less likely to be decision-makers in deploying funding or capital. So, in this realm, foundations and impact investors should focus squarely on reducing the barriers to asset ownership and equalizing access to investment capital.

With homeownership, the current disparities are stark. The homeownership rate for Black people is 44 percent and the rate for Latinx people is 51 percent, compared to 72 percent for White people. Lenders also routinely charge Black and Latinx borrowers higher interest rates. Eliminating the mortgage interest rate disparity alone could save homebuyers of color up to half a billion dollars per year. Furthermore, owning a home can meaningfully improve the household balance sheets of families of color—enabling them to use their home as collateral to secure high-quality, attractively priced financing for their businesses and unlocking a virtuous cycle of credit building.

As for business ownership, the data are perhaps even more concerning. Black, Native, and Latinx business owners account for less than 10 percent of all business owners, even though they represent more than a third of the US population.

Just as troubling, even if a person of color overcomes the odds and becomes a business owner, that person will not end up with equal access to investment capital. Research from the Federal Reserve shows that existing businesses owned by people of color have lower financing approval rates than their White-owned counterparts. While 35 percent of White applicants report getting all the financing they applied for, just 24 percent of Native applicants, 19 percent of Latinx applicants, 16 percent of Black applicants, and 15 percent of Asian American applicants reported the same.

Such barriers are even greater for people seeking funding for early-stage enterprises. Less than 3 percent of venture capital funding goes to Black or Latinx founders. And, regarding the folks making venture financing decisions, only 1 percent of venture capital decision-makers are Black and only 2 percent are Latinx (despite clear data that diverse teams have better returns).

To address the barriers to ownership and equalize access to investment capital, we encourage foundations and impact investors to allocate their capital using a lens that considers equitable economic empowerment at every step.

First, examine the leadership of organizations and funds that receive investment for lived and professional experience. If possible or feasible, track identity information across the pipeline and portfolio to assess any potential bias in decision-making and ensure that any organizations focused on serving communities of color are representative of that community.

Second, consider the outcomes produced as a result of the investment. Prioritize investments that support products and/or services specifically focused on improving lives and outcomes for people of color—like inclusive financial products, pathways to homeownership, culturally appropriate medical care, and access to education.

And third, examine each investment—and for foundations, by each investment, we mean the entirety of the 95 percent of assets that comprise the foundation’s corpus, as Heron has done—with an eye on building an inclusive ecosystem. Are the investees explicitly committed to and have a track record of inclusive and equitable business practices? Is the organization engaged in activities that advance racial equity, such as internships, field building, thought leadership, and so on?

This approach will help drive progress on racial equity and power building. The Candide Group’s Olamina Fund offers a prime example of this approach. Created to address the historic lack of access to capital in US communities, the Olamina Fund focuses on funding CDFIs led by women, Black people, Native people, and other people of color, who have faced decades of disinvestment and intentional extraction. At the time of investment, 100 percent of Olamina’s borrowers were led by women and people of color. 

Catalyzing Momentum for Fundamental Change 

To be sure, some financing structures best tailored to deliver the investment objectives described above are still in the early stages of their development. For that reason, they require a nontraditional approach from capital allocators.

For example, in this context of economic empowerment, philanthropists and impact investors hold tremendous potential to ignite a virtuous cycle of progress by allocating “catalytic capital.” Catalytic capital includes investments that willingly accept lower returns or higher risk, or the use of innovative and unconventional financing structures, like capped revenue rights or a royalty contract that matches the variability and risk appetite of the investor. Although catalytic capital can generate a positive impact right away, its deeper power is in carving new paths through which future capital can flow. In this way, such investments have the potential to create an immediate impact while also laying a foundation for future gains.

Philanthropists and impact investors can deploy capital across the investment continuum. And they don’t have to go it alone: the Catalytic Capital Consortium (C3), which was launched by a trio of leading foundations (MacArthur, Rockefeller, and Omidyar), is helping to demonstrate the power of this form of investment through real-world practice and research.

To be sure, risk-taking is required. But not acting is a greater risk.

Indeed, we know all too well that investing around the edges will not be sufficient. As introductory physics class makes clear, momentum is only generated from both mass—the scale and depth of the capital allocated in these ways—and velocity—the agility and speed with which that capital comes.

The key to unlocking momentum lies in targeting philanthropy and impact investment toward clear racial and economic justice goals. With a clear set of actionable objectives, foundations, philanthropists, and impact investors can move the needle on racial equity—but only if they are willing to act swiftly and intentionally.