Barriers to Social Justice Investing
This piece is based on our report, Building a Social Justice Investment Chain, which is informed by 1-on-1 and small group conversations and interviews with socially responsible investors, community organizers, and others who are engaged in trying to make our money work for us.
At Just Futures, we promote Social Justice Investing, which we define as investing that:
Social Justice Investing opportunities exist mainly in private markets. While opportunities for Social Justice Investing have improved and expanded dramatically in recent years, the sector still faces a number of challenges:
Social justice investing is out of reach for many ordinary people
Many social justice investment funds have cost-prohibitive minimum investments — generally ranging from $1,000 to $50,000 — and some are only open to accredited or institutional investors, that is, investors with high income or high net worth or who have professional credentials. Additionally, many funds can only accept investments from people who live in certain states or regions. In many cases, the very few investment advisors who specialize in moving money to social justice and community investments frequently require clients to bring even larger minimum investments for their services — often ranging from $100,000 to $1 million.
Small scale can prohibit large investments
On the opposite end of the spectrum, investors who want to move large sums of money to social justice funds may find that they are unable to do so. Compared to Wall Street options, social justice funds are quite small — generally between $1 million and $10 million. Some social justice investment funds are relatively new and do not have the track record needed to meet the due diligence needs of large investors. Investors have expressed skepticism about these funds’ ability to absorb large sums and efficiently deploy it to investable enterprises.
For example, the managing director of an intermediary fund which prioritizes, among other things, investing in Native Community Development Financial Institutions (CDFIs), explained that their policy dictated they could only invest in funds that were at least three years old and had a minimum of $10 million in assets. This eliminated 80% of Native CDFIs.
Finally, this class of investor can sometimes feel that making relatively small investments is just not worth the time. As one interviewee said, “It takes as much time to underwrite a $200k loan as a $200 million loan.”
That being said, Just Futures knows that many social justice investment funds are equipped to handle larger amounts of capital. The sector’s small scale is more a reflection of investors’ emphasis on profits. Some social justice investment fund managers expressed that the due diligence requirements are unreasonable and established purely to protect investor assets rather than provide what communities actually need.
Aligning on terms can be difficult
Even when investors and social justice funds meet each other’s minimum requirements, they can still struggle to align on specific loan terms. As Social Justice Investing is seen as relatively high risk, investors often want the possibility of high returns. But, due to the non-extractive relationships between social justice funds and their investees, they are often not able — or even attempting — to deliver substantial financial returns. The focus is on community benefits instead.
In turn, social justice investment funds likewise want patient capital, generally looking for investors who can commit funds for a minimum of 3 to 7 years, sometimes more. Traditional investors, however, often look for greater liquidity.
Perceived high-risk, low-reward
Since Social Justice Investing seemingly deprioritizes profit, is positioned to net lower returns as compared to more mainstream investing strategies at the same risk level, and is often based on trust rather than personal guarantees or negative repercussions, many traditional investors perceive it to be a high-risk, low-reward sector. (Note: Social Justice Investing is distinct from investing through Just Futures’ model retirement portfolios, which we believe offer financial return potential that is similar to mainstream public market investing. In working toward being able to offer Social Justice Investing opportunities to our clients, we recognize that not everyone will be in a financial position to accept lower rates of returns associated with Social Justice Investing.) However, when we consider long-term social, political, and environmental impacts, mainstream, extractive investing is much riskier than Social Justice Investing. What good is a seven-figure portfolio if the earth is no longer habitable? Interviewees argued that, even on strictly financial terms, Social Justice Investing is low risk, as repayment rates tend to be quite high. Still, whether the characterization is fair or not, the perception that Social Justice Investing is high-risk and low-reward dissuades some would-be investors.
Investment process is not streamlined
Another challenge facing the sector is the lack of a standardized investment process. Unlike public market investment products, private market social justice investments each have their own process and paperwork, which increases the amount of time and labor expense that investors need to spend to get investments out the door.
People don’t know where their money is invested
One issue raised by several interviewees is that most people have no idea where their money is invested. This is even true of wealthy people who spend more time and energy managing their investments. Several investment advisors said that the first step they take with clients is showing them where their money is currently invested and then having a conversation about how that does or does not align with the investors’ values. Indeed, many people are generally unaware of the harmful activities that their investments may be funding.
This issue is exacerbated by the proliferation of ESG-branded investment products that fall far short of actual Social Justice Investing values. Many people who want to invest responsibly simply move their money into ESG funds without looking at the funds’ holdings. This allows the extractive intermediaries discussed above to continue to capture the investment dollars of people looking to invest responsibly.
We are unwilling to accept these barriers to Social Justice Investing as limitations on what is possible.
So, we’re working to create better investment options for regular people. This work includes researching options — for example, a social justice investment platform and a self-directed brokerage window — to make private market social justice investments more accessible. We’re also striving to improve public market investment products. Read on to learn more about how we are innovating in an effort to bring you increasingly more social justice values-aligned investment products.
If your employer doesn't offer a retirement plan, or if they contract with a different administrator, we’d love to show you the Just Futures advantage! You can reach us at info@justfutures.com.
Just Futures uses rigorous analyses to provide you with progressive investment options. Meanwhile, we are working to improve our current financial system to be able to, over time, offer you increasingly better places to put your retirement savings.