Investing in Women- or Minority-Led Funds? This Major Bank Is, Too

In today's rapidly changing business landscape, diversity and inclusion have become hot topics that have taken center stage. Many major corporations are recognizing the value of investing in women- or minority-led funds, resulting in an increasing number of such funds being created. Bank of America joined the trend in 2020 and since then, has committed more than $500 million in investments to minority- and women-led funds. Here's why many banks and other financial institutions are beginning to invest in these firms and what the future holds for such investments.

Why is investing in women- or minority-led businesses important?

The number of minority- and women-owned businesses has grown dramatically in the past decade. Minority-owned businesses in the U.S. now make up about 20% of employer companies and have close to 10 million workers. Women-owned businesses make up 21.4% and employ 10.9 million employees.

Numerous studies show that these firms not only perform better than their competitors, but also have significant benefits for the community.

Better financial performance

According to research, businesses that are run by women or people of color are more likely to hire diverse employees, and companies that prioritize racial and ethnic diversity have been found to have stronger financial returns.

Specifically, those in the top quartile for racial and ethnic diversity are 35% more likely to outperform their peers. Similarly, companies in the top quartile for gender diversity are 15% more likely to achieve financial success.

Recent research has found that companies in the bottom quartile for gender, ethnicity, and race are more likely to lag in financial returns. In the U.S., for every 10% increase in diversity, earnings before interest and taxes (EBIT) rises by 0.8% on average, highlighting the importance of a diverse and inclusive workforce in driving financial success.

Better products and services

Numerous studies show that diverse teams generate more creative ideas. By bringing together individuals with different backgrounds and perspectives, diverse teams can tap into a wealth of unique insights that may have been missed in a non-diverse group.

Research by Hewlett, Marshall, and Sherbin further showed that diverse leaders were more likely to foster an environment conducive to creativity and innovation. When working in diverse teams, members were able to connect with a broader range of end users and develop products that reflected their needs.

Boston Consulting Group found that companies with diverse management teams had a 19% higher revenue generated from innovation compared to those with less diverse teams.

Narrow the gender pay and wealth gap

Minority- and women-owned businesses can play a pivotal role in narrowing the gender and wealth gap. Those who own businesses tend to have a higher net worth than those who do not. According to recent data, the median net worth of self-employed families was $380,000, which is more than four times higher than the typical working family's net worth of $90,000.

A study from Closing the Women's Wealth Gap found that black women entrepreneurs have a median net worth 10 times higher than their non–business owning counterparts. In addition, the annual earnings of women-owned businesses saw an impressive increase of nearly 30% in the past year. Notably, manufacturing businesses owned by women excelled with a remarkable 35% growth.

Women-owned companies also experienced a significant growth rate of 16.7% from 2012 to 2019, surpassing the 5.2% growth rate achieved by their male counterparts. These firms are also more likely to hire minority and women employees, creating more job opportunities. These statistics highlight the successful trajectory of women and minority entrepreneurship and the immense potential for further growth.

Benefit the local economy and community

Businesses with diverse ownership play a meaningful role in supporting the health and well-being of their communities. These companies offer a range of goods and services that improve quality of life and contribute to the local economy.

In fact, when individuals spend their money with these businesses, a significant portion of the revenue stays in the surrounding area. According to a report by American Express, roughly $0.67 of every dollar spent with a locally owned small business stays in the community.

This money helps support both the business owner and their employees through payroll and benefits, as well as other local businesses through additional spending. These companies not only strengthen the local economy, but also the well-being of the local community.

Access to capital is a big problem

While the data clearly shows the benefits of minority- and women-owned businesses, these businesses often face difficulties getting the working capital and loans they need to grow and stay afloat.

Women or minority entrepreneurs often face more barriers when it comes to access to capital than their white and male counterparts. A recent report from Diversity VC revealed some alarming figures for startups with diverse leaders. Out of the $31 billion held by 200 venture capital funds, only 1.87% was directed toward them.

By investing half a billion dollars in such funds, Bank of America is helping bridge that gap while also supporting entrepreneurs who would otherwise have difficulty finding funding. BofA isn't the only one; Citi launched a $150 Million Impact Investing Fund for women and minority entrepreneurs in 2020, and JP Morgan has invested the first $40 million of the $50 million equity pledge to Black and Latinx-led financial institutions.

Having access to resources, such as grants and funding, can help address the obstacles that these groups face in the business world. By funding these types of businesses, Bank of America is not only looking to promote diversity but also actively supporting socially impactful initiatives. Ultimately, supporting these groups not only benefits them, but also has a positive impact on communities and the overall economy. By leveling the playing field and providing equal opportunities, these investments can foster an inclusive and prosperous society.