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September 21, 2015

The Investment Implications of Mass Incarceration
    by Robert Kropp

In a three-part series and subsequent conference call, Sonia Kowal of Zevin Asset Management outlines for foundations and other investors the importance of aligning their strategies with their social missions. -- “The United States is the world's leader in incarceration with 2.2 million people currently in the nation's prisons or jails,” states The Sentencing Project, “a 500% increase over the past thirty years.” The informed reader will recognize that the explosion in imprisonment neatly coincides with the so-called war on drugs, a failed effort that has done nothing to reduce illegal drug use but has ripped families and entire communities apart.

In a three-part series, Sonia Kowal of
Zevin Asset Management observes that the current practice of mass incarceration “is attracting billions in investment dollars at the expense of the US economy and labor force.” Mass incarceration, she writes, is fiscally unsustainable and removes millions of potentially productive workers from the US job market.

A graph included by Kowal in the series emphatically demonstrates the degree to which the impacts of the rates of incarceration are overwhelmingly experienced in African American communities, so much so that Michelle Alexander, author of
The New Jim Crow: Mass Incarceration in the Age of Colorblindness, describes it as “a stunningly comprehensive and well-disguised system of racialized social control that functions in a manner strikingly similar to Jim Crow.”

Kowal references The New Jim Crow in the Zevin series, observing that while rates of drug use by whites and blacks are similar, young black men are far more likely to experience imprisonment.

“Young black men who did not finish high school,” Kowal writes, “are more likely to be locked up than employed and today more than two-thirds of black male drop-outs are expected to serve time in prison…Racially discriminatory sentencing exacerbates social instability and leads to an adversarial relationship between institutions and poor communities, as we have seen in places like Ferguson and Baltimore.”

In Part 2 of the series, Kowal turns her attention to criminal background checks, the current widespread use of which essentially condemns the 22% of Americans with criminal records to unemployability. “Our economy is less efficient because a large and growing cross-section of society is left idle and unemployed as a result of discrimination against historic or irrelevant offenses,” she writes. Furthermore, “given the disparate racial impact of the criminal justice system, corporate bans on hiring people with records disproportionately affects communities of color.”

Zevin Asset Management, Kowal reports, is “working on an investor letter on this topic to be sent to S&P 500 company CEOs to get the issue on their radar screens.”

Keeping in mind that Zevin is an investment asset manager, the direct connection to shareowner action—despite its relatively small size, the firm is a leading practitioner of corporate engagement—comes clear in Part 3 of the essay, where Kowal takes on the phenomenon of private prisons in the US. It has become fairly well known that these corporations lobby extensively for legislative action such as lengthier prison terms, which simultaneously boost their bottom lines while worsening the misery of many communities across the US. “Private prison companies make money by having people in prison,” Kowal writes. “The more activities that are criminalized in society, the more these companies make; repeat customers are good for business, essentially dis-incentivizing them to rehabilitate inmates.”

The negative impacts go even beyond the moral repugnance of finding profit in lengthier sentences, Kowal continues. Private prisons are most often located in small rural communities that are unprepared for the environmental impacts of a large institution in their midst. Studies have identified numerous cases of physical and sexual abuse of inmates; “They do not remotely adhere to the United Nations
Guiding Principles on Business and Human Rights,” Kowal writes.

“While many of the mechanisms that would reform the current system are not details that investors can specifically help with,” Kowal continues, the option of divestment—as has been seen in the fossil fuel movement—can, especially if organized effectively, speak out emphatically on investors’ commitment to moral and environmental justice.

Last week, Kowal followed up the publication of the series with a conference call designed to help foundations and other institutional investors “align your investments more closely with your organizational mission and values, especially around the topic of criminal justice.” (The call went unrecorded, but Ms. Kowal was kind enough to supply me what she described in an email as detailed presentation notes.)

Referring to foundations such as that of Bill and Melinda Gates, whose investments in private prisons have come under fire for undermining its stated social mission, Kowal said, “It’s important to remember that fundamentally, finance is about serving society, and therefore serving people; not the other way around.”

“Apart from being deeply troubling morally,” Kowal continued, “income inequality is also an indicator of economic dysfunction and thus a risk for markets. One of the big drivers of income inequality is mass incarceration.”

As for criminal background checks, some of the options explored in the call include contacting companies to address the matter; considering investment in financial products such as social impact bonds that address recidivism; and supporting social enterprises whose policies include the hiring of ex-offenders.

Referring to private prisons, Kowal said, “Although they house only a small proportion of people who are incarcerated, their impact on the system through their lobbying of increased criminalization is enormous. GEO and CCA have spent at least $45m over the past decade lobbying federal government on top of any lobbying they may have done on the state and local level.”

Kowal reported that the American Friends Service Committee will soon publish a list of all the major actors in the incarceration industry, “ranging from private operators and contractors to companies benefitting from prison labor and privatized services in prisons.” The publication of such a list, Kowal believes, will strengthen the ability of shareowners to pressure corporations to act sustainably, and ease the process of divestment from those companies whose responses are inadequate.

“We need to build new economies and systems we don’t yet have in place,” Kowal concluded. “I hope you have seen how powerful your investments can be in playing a role in changing the current system of inequity.”

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