Why Advisors of High Net Worth Investors Should Pay Attention
Impact investing continues to gain popularity among investors seeking opportunities for their wealth to create positive change in the world.
As of 2016, $8.72 trillion of investment assets under professional management were managed with an impact mandate. That amount represents more than 20% of total professionally-managed assets in the United States, up from just over 10% in 2012. Advisors who ignore this trend are limiting their own potential and, more importantly, could be falling short of their clients’ expectations.
Not Just a Passing Trend
Investor demand for impact investing strategies is significant. According to Morgan Stanley, 75% of investors are interested in sustainable investing, including 84% of women and 86% of millennials. As wealth is passed down to future generations, advisors should expect an increasing demand for impactful strategies.
Motivations for impact investments are as broad and diverse as the individuals who seek to make a positive change in the world. Some investors are looking for a general alignment of their views with the holdings in their portfolio, while other investors are very specific about their goals, requiring highly-customized impact investments. Examples of these types of investments range from empowering women entrepreneurs in Africa to advancing cancer therapy research.
Advisors have not yet caught up with demand; fewer than half of investors have implemented sustainable strategies into their portfolios. This disparity creates an opportunity for advisors at the forefront of impact investing.
Why Impact Investing Hasn’t Caught Up with Demand
The lack of adoption could partially be explained by the perception that impact investing results in lower returns. Once viewed as an indirect charitable cause (giving up return to support noble causes), impact investing is becoming increasingly viewed as a viable performance-generation strategy.
Recent studies show that impact-oriented funds have outperformed their traditional peers, and impact-oriented benchmarks have outperformed traditional benchmarks. This outperformance holds true at the company level as well. Companies rated as “The Best Companies to Work For” have achieved outperformance relative to industry peers. Companies that have begun sustainability initiatives have also observed positive financial results:
- 90% of companies observed lower costs of capital
- 80% showed a positive relationship between sustainability practices and stock performance
- 88% attributed operational improvements to environmental, social, and governance (ESG) practices
It can be debated whether the sustainability investments caused the financial improvements, or if forward-thinking management teams tend to invest in sustainability projects, producing superior financial returns.
Some investors, especially those with very specific impact goals, are accepting of below-market-rate returns. A 2017 survey shows that about 2 out of 3 impact investors seek risk-adjusted market-rate returns, while 18% target below-market-rate returns that are closer to market rate, and 16% have a target return closer to capital preservation.
Overall, the results have been similar to expectations; 3 out of 4 respondents said returns were in-line with expectations, while 9% were underperforming, and 15% were outperforming.
How Do You Know if an Impact Investment is Making an Impact?
Measuring the performance of impact investments is multifaceted and requires additional metrics compared to traditional investments. Financial returns can be measured just like traditional investments, but measuring the actual impact of an investment is a bit more nuanced.
One hesitation some investors have is the fear of not knowing what their money is doing to change the world. Recently, a number of metrics have begun to surface to measure impact. These metrics include IRIS (Impact Reporting and Investing Standards), USSPM (The Universal Standards for Social Performance Management), GIIRS (Global Impact Investment Rating System), and the United Nations Sustainable Development Goals. Additionally, many impact managers provide customized impact reports for their clients’ portfolios.
Impact investing has come a long way over the past decade. As investor interest continues to gain momentum, advisors must adapt to their needs to stay relevant.