EXPLAINER: What is a Racial Equity Audit, and why are Canada’s big banks conducting them? 

Following investor pressure supported by SHARE – the Shareholder Association for Research and Education – two of Canada’s biggest banks have agreed to conduct racial equity audits (REAs). 

Royal Bank of Canada (RBC) and Bank of Montreal (BMO) have been facing increased scrutiny since their annual general meetings in the spring, when significant percentages of shareholders supported SHARE-sponsored proposals urging the banks to conduct REAs.  

Earlier this month, SHARE announced its intention to re-file the proposals at the banks’ 2024 AGMs; within hours of that statement, both banks committed to undertaking the audits. 

So, what exactly is a racial equity audit? Who conducts them? And why is SHARE pushing for the banks to do them? With this blog post, we aim to shed light on a powerful emerging tool for companies to assess the impacts of their business practices on Black, Indigenous and other communities of colour – and for investors to hold those companies accountable. 

The May, 2020 murder of George Floyd served as a flashpoint for increased awareness of racial justice within the public consciousness throughout the United States and the world. In the days and weeks that followed, it was hard not to notice the number of corporate brands – both large and small – that took to social media to express allyship with the Black Lives Matter movement.  

Just over a year later, in June 2021, the discovery of 215 unmarked graves outside of the site of a former residential school in Kamloops, B.C., led to a new wave of corporate posts expressing sorrow at Canada’s colonial history and support for Indigenous communities. 

Such events are all too familiar to Black, Indigenous and other communities of colour who have for centuries faced disparate outcomes both socially and economically – outcomes that are often exacerbated by the actions and business practices of corporations that then claim allyship when it is opportune to do so. 

However, this broader shift in public consciousness has had the positive effect of making it more difficult for companies to minimize responsibility for racial inequity and the impacts of their own business practices and operations. 

When it comes to evaluating employment and business practices through an equity lens, the most powerful tool at a company’s disposal is a third-party racial equity audit (REA). An REA can help a company identify and address shortcomings that have a negative impact on racialized communities, and the systemic risks to shareholder value that these shortcomings represent. 

An REA is performed by an independent team, with specialized subject matter expertise in racism, bias and discrimination in the relevant legal context. An increasing number law firms are now establishing departments dedicated entirely to racial equity audits. A comprehensive audit should include the active participation of BIPOC stakeholders, with clear pathways to participation and include explicit protections from professional repercussions. 

Depending on scope, it may involve the systematic examination of leadership and board composition, staffing and hiring policies, as well as business practices. Should the company currently be undertaking DEI efforts to address systemic racism, an REA will also examine the merits of these efforts in light of its racial justice commitment.  

Undertaking an REA allows companies to identify and address both actual and potential disparate outcomes for BIPOC communities, allowing them to address issues before they negatively impact the communities at risk as well as the value of the company itself. 

 For example, in January of 2023 the City National Bank (a US subsidiary of the Royal Bank of Canada) settled a lawsuit brought forward by the US Department of Justice, which accused the bank of undertaking a process known as “redlining”. Redlining is an illegal practice where financial institutions avoid marketing and underwriting mortgages in racialized neighborhoods. At $31 million USD, this was the largest settlement of its kind – and exactly the type of pattern a robust racial equity audit could have helped to identify and rectify proactively.  

As an organization committed to the promotion of responsible investment, SHARE has regularly engaged with companies on behalf of shareholders to promote the importance and benefits of undertaking an REA. More and more, consumers are demanding ethical operations from a company. This can translate to a risk of lost market share for companies that pay lip service to issues like racial equity without meaningful action to improve their operations, and therefore a risk of lower returns for the investors who hold shares in those companies. 

Before a company can claim leadership on racial equity, it must commit to engaging in a critical analysis of how its operations impact communities at risk. Failure to do so can expose a company to a variety of risks, from talent drain to serious legal and reputational repercussions.  Such concerns should be top-of-mind for multi-billion-dollar corporations with huge reach and major impact, particularly as asset managers and the funds they represent become increasingly mindful of the risks posed by unevaluated operations.  

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