Urban Wire Three Ways Corporate Philanthropy Can Address the Racial Wealth Gap
Jorge González-Hermoso, Brett Theodos, Michael Neal
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The COVID-19 pandemic and nationwide protests following George Floyd’s murder spurred an unprecedented increase in financial support for efforts aimed at dismantling structural racism and advancing equity, including in community-development finance. Here, we overview a framework about the potential pathways for these investments to create wealth for Black and other communities of color.

Our research suggests embedding equity as a business imperative into corporations’ policies and practices, like they have centered commitments, could help them better scale investments that make an impact in communities of color.

U.S. Bank is undertaking this approach through U.S. Bank Access Commitment™, its long-term approach to help build wealth for diverse communities. The Urban Institute supported the work by developing an evidence-based theory of change that explains how an intervention—in this case, greater investments in racial equity across its policies and practices—and analyzes how it will lead to specific changes in wealth equity.

In developing our theory of change, we identified three pathways through which the initiatives could build wealth for communities of color and steps other corporate philanthropic efforts can take to achieve similar goals.

1. Provide career advancement opportunities for current and future employees of color

The most immediate way a corporation can foster wealth creation is among its own workforce.

Employers can diversify their workforce by hiring more people of color. Yet research shows Black and Latin workers see fewer financial benefits from employment than their white counterparts, in part because of lower wages. And this isn’t improving: the gap between Black and white people’s wages today exceeds the difference of a generation ago. Black and Latin workers are often hired into entry-level positions, which face higher rates of attrition and reduce employees’ ability to be promoted (PDF) to senior positions. Latin workers are also more likely to be born outside the U.S., which creates more barriers for stable employment. Black workers and other workers of color also report facing a lack of sponsorship to support their advancement. (Note: We’ve chosen to use “Latin” because it’s gender neutral, but we recognize everyone in this group may not identify with the term.)

To combat these inequities, corporations can contribute to closing the racial wealth gap through the following:

• diversifying their hiring practices, such as through targeted outreach to prospective employees of color when hiring for higher-wage positions

• paying living wages and competitive benefits

• offering professional development education and networking opportunities for both nonsupervisory employees and managers

• mandating trainings to eliminate implicit biases at senior levels

• increasing opportunities for staff to develop and demonstrate new skills

2. Help customers access asset-building tools and supports

Access to financial assets and other forms of equity is essential for building wealth. However, Black and Latin families are less likely than white families to achieve homeownership and to hold financial accounts, two key types of wealth-building assets.

The racial homeownership gap stems partly from deficits in household income and financial literacy and from racial discrimination related to credit and collateral for people of color. Even when they own a home, Black families may face discrimination in the valuation of these assets. Black and Latin investors may also have lower risk tolerances, which may limit their allocation to higher-risk financial assets with potentially greater returns.

Corporations can address these inequities as they serve their customers. Financial firms can combine financial education and coaching with supportive technology products, such as mobile applications, to help their clients bolster savings, credit, and investment practices. They can also leverage their networks to connect customers with external financial products and tools. Targeted services for clients of color to access mortgages and wealth management services can also help them overcome barriers.

3. Expand and empower networks of Black and Latin vendors

Business ownership provides an avenue for wealth creation, but ownership is unequal across racial and ethnic groups. Inequitable access to credit plays a key role.

Businesses, on average, receive less of the total financing amount sought when the owner is a person of color than when they’re white. Barriers to access debt capital also reflect gaps in generational wealth and technical proficiency in loan application. Lack of connections to resource-building networks, mistrust of institutions that support entrepreneurship with a history of discrimination, and lack of cash to sustain the long pay cycles of large clients can also hold back Black- and Latin-owned businesses.

To break down these barriers, corporate initiatives can do the following:

• diversify their suppliers

• reform their procurement practices

• shorten their pay cycles

• offer no-interest loans to Black- and Latin-owned firms in contract with large clients while they wait to get their invoices paid

• expand asset-building entities and services, such as financial institutions and investors

• dedicate resources to support organizations that already work to  elevate and grow diverse businesses in their footprints, such as community development financial institutions, business incubators, and small business development centers, which could also help overcome distrust or skepticism that people of color may have toward financial institutions because of historical exploitation

Dismantling structural racism in community development financial practices and policies can help level the financial playing field. These evidence-based strategies can help corporate and other philanthropies fulfill their promises and achieve these goals.

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Research Areas Economic mobility and inequality
Tags Community and economic development Racial wealth gap Financial products and services Small businesses
Policy Centers Metropolitan Housing and Communities Policy Center
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