A guide to impact investing in Black economic mobility

| Report

In recent decades, institutional investors have expanded the criteria they consider when evaluating investment opportunities. Environmental, social, and governance (ESG) inputs have become a regular part of the conversation for traditional investors. Meanwhile, impact investing—which seeks to not only achieve measurable benefits across ESG but also generate attractive financial returns—has the potential to unleash a rising wave of funding for innovative companies aligned with this mission.

The convergence of several major factors—from climate change to the reevaluation of the private sector’s responsibility to society at large—has spurred investors to weave broader considerations into their strategies and decision making. A recent McKinsey survey on ESG and impact investing found the majority of investors now consider ESG factors as part of their investment and portfolio management decisions (Exhibit 1).

All surveyed incorporate social considerations into their investment approach and portfolio management.

More than 50 percent of limited partners (LPs) currently allocate capital to impact funds, which aim to generate measurable benefits across ESG in addition to attractive financial returns (Exhibit 2). Nearly that same percentage indicated they haven’t invested in these funds but would consider doing so in the future. About one-fifth reported they had been pressured to invest in impact funds by capital contributors; only 12 percent expected to earn higher returns from these investments.

More than half of limited partners allocate capital to impact funds; those who do not are considering doing so in the future.

The groundswell of interest in ESG and impact investing dovetails with the elevation of Black economic mobility as a prominent issue for society and business alike. Economic mobility—and, by extension, the experiences of Black Americans—is a critical component of the S in ESG.

The racial reckoning in 2020 and the tragic effects of the COVID-19 pandemic have both illuminated and exacerbated these inequities. In response to these crises, private-capital investors have begun prioritizing investment opportunities to promote inclusion and economic mobility for Black Americans. To date, US investors have committed more than $350 billion to this cause.1

However, private-capital investors face three core obstacles to successfully investing in Black economic mobility: a gap between committed capital and needed capital; a small number of Black-founded, -owned, and -led funds; and a lack of clearly identified impactful investable themes.

To get a better understanding of the investment landscape to support Black economic mobility, we drew on several sources. We conducted a survey of 100 private equity and venture capital funds, institutional investors, and impact investors in August 2022 to gain visibility into the prevailing perceptions of ESG and impact investing and how trends might evolve in the future. In addition, we aggregated and analyzed data on existing racial disparities that affect the Black population and explored potential investment opportunities to address them.

Our analysis identified eight socioeconomic pillars that represent the areas with the highest potential to move the needle on Black economic mobility: affordable housing, pre-K–12 education, health equity, financial inclusion, credit and ecosystem development for SMEs, workforce training and job attainment, the digital divide, and public infrastructure. These pillars could also offer investors favorable market returns.

We hope that by highlighting the wide range of investment opportunities, this report provides investors with a road map for increasing their financial support and engagement in the fight for Black economic mobility.

Investors have a unique opportunity to lift up Black communities, minority- and women-owned businesses, and the country as a whole. They should not let this moment pass without concerted action.

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