Interest In “Impact Investing” Increasing
Charles Paikert, Editor
“Impact investing” may be about to make an impact in wealth management.
The concept is based on making an investment in a business, enterprise or fund that can achieve a positive environmental and/or social impact as well as a positive return on the investment.
Not only does impact investing appeal to Baby Boomers, say wealth managers, it can also serve as powerful glue that solidifies clients’ relationships with their advisors.
“Baby boomers are choosing to live lives of greater significance, and they’re asking for portfolios to be aligned with their values,” said Ron Cordes co-chairman, Genworth Financial Wealth Management. “Impact investing resonates with their desire to be change makers.”
But impact investing shouldn’t be confused with charity, and in fact is a legitimate investment that offers clients the opportunity to make – or lose – money, proponents say.
Nor should impact investing be confused with socially responsible investing, they say, which, at least historically, has been primarily concerned with screening out objectionable companies or sectors from a portfolio.
By contrast, impact investing typically targets companies involved in micro-finance, energy, health, water, affordable housing and even charter schools.
“It’s a rifle shot approach, as opposed to the shotgun approach we’ve seen in socially responsible investing,” Cordes said. “And impact investing is not disguised philanthropy. There’s an investing rigor associated with it.”
“Impact investing definitely has the opportunity to outperform the market,” said Raul Pomares, managing director at Springcreek Advisors inMarin County,California. “It’s not about negatively screening things out or risk mitigation. A company that does good things for the environment can also be good for business and investors are investing in good business management.”
Pomares and other advisors who have been involved in impact investing say interest in the concept is increasing.
“It’s been received quite favorably by the foundation community,” Pomares said, “and we’re seeing it more and more in the retail market, especially in California and Massachusetts.”
“We’re seeing rising interest from two groups: clients who are already deeply committed to philanthropy and see impact investing as an extension and the second generation of clients who have different beliefs and don’t necessarily think there are trade-offs between doing good and doing well,” saidDeb Wetherby, chief executive of Wetherby Asset Management in San Francisco.
Younger clients have grown up with companies like Body Shop, Ben & Jerry’s and Whole Foods, Wetherby points out, and are used to the idea that “companies who are good corporate citizens can also produce good return on investment.”
As this is a relatively new style of investing, there is as yet not much data on the track record of how impact investing stacks up compared with other styles of asset management. However, other forms of socially responsible investment have been shown to yield superior returns over certain periods, in part because SRI has excluded firms with poor corporate governance, for example. (To view a related article on the performance of SRI, click here).
Wealth managers have also been impressed by impact investing’s ability to strengthen relationships with clients – and potential clients.
“It’s not just a line on a financial statement,” Cordes said. “Impact investing gives the advisor the ability to make an emotional connection with clients and it also creates a multi-generational glue between baby boomers and their children.”
Impact investing is “an opportunity to form a deeper and more comprehensive relationship with the client,” said Pomares. “It changes the dynamics of the conversation and creates stickier assets.”
But, he cautioned, the advisors’ interest in impact investing has to be “genuine and real. Advisors who pursue this as a pure marketing strategy will be perceived as ‘greenwashing’ [making a false claim to be an environmentalist]. Advisors might have short-term success but it won’t last.”
But long-term prospects for the spread of impact investing are promising.
“We’re in the early innings now, but there will be more products and investment opportunities in the next three to five years,” said Cordes.
What’s more, impact investing and wealth management are a perfect fit, according to Wetherby.
“We’re trying to help clients accomplish what is important to them,” she said. “Our job is broader than just numbers on a page.”