The Impact Investing Imperative for Advisors
In some of my previous articles on impact investing, I have traced the history by providing a historical overview, beginning with Biblical times, and chronicled the explosive growth it has garnered in the past few decades. In this article, I will pick up the narrative and highlight reasons why financial advisors should consider making impact investing a part of their practice.
Advisors, challenged to differentiate their practice, are seeking new ways to expand and solidify client relationships. Impact investing is a pivotal channel to engage with their clients’ social aspirations and tailor more meaningful portfolios with the goal of better outcomes.
Despite growing levels of client demand coupled with the increase in impact investing assets, too few advisors are incorporating impact investing into their practice. A 2015 report by Cerulli Associates notes that only 7% say they are “highly interested,” whereas 30% say they are “somewhat interested” in impact investing; the remaining 63% express little or no interest. These numbers underscore that advisors are not only missing an enormous opportunity but also placing their advisory practice at risk. That’s because clients are driving the impact investment train—74% want their advisors to deliver both competitive returns AND positive impact, and 65% say they are more likely to stay with advisors who raise and discuss the issue with them. By any measure, those figures are a clarion call to advisors who are still on the sidelines in offering impact investing portfolios to their clients.
The soaring growth of impact investing provides additional rationale for why advisors should integrate impact investing into their practice. The Global Impact Investing Network’s (GINN) Annual Impact Investor Survey 2018 of 229 participants, representing $228 billion in assets, revealed that $35 billion (or 15%) comprised impact assets in 2017, and that figure is projected to rise by 8% this year. Investments have expanded to education and food & agriculture and to geographic areas in East and Southeast Asia. Moreover, 91% of respondents report that impact investment results have met or exceeded their financial expectations, and nearly all (97%) say those investments have met or surpassed their expectations for making a positive impact.
Interest among retail investors grew from 10.7% in 2012 to 25.7% in 2016—an increase of 140%. And clients have a variety of choices. Impact investing encompasses a broad spectrum, ranging from faith-based, climate-aware, community-based, to gender-lens, offering advisors a clear path to developing deeper, more sustained relationships in areas that resonate with their clients.
Impact investing should only accelerate, as Baby Boomers transfer to their heirs $30 trillion in assets over the next 30 – 40 years, of which nearly 70% will be inherited by women. And wide interest in reviewing portfolios with impact in mind is exhibited across the investor strata: 16% of Millennials, 13% of Baby Boomers, and 20% of GenX are doing so, plus another 30% who don’t affiliate with any of these specific group. Advisors who hope to cultivate the next generation of clients should pay heed.
At the same time, impact investing equips advisors with a tool to build better portfolios. Because studies have shown financial performance can be correlated with making a positive impact, clients need not necessarily sacrifice attractive investment returns on the altar of aligning investments with their values. The price appreciation for MSCK KLD 400 Social Index is a case in point, rising nearly 400% from 2010-2017. Additionally, impact-focused separately managed accounts (SMAs) boast 15.4% in outperformance over nonimpact SMAS, measured over a complete market cycle. And from 1993-2014, companies with a high score in environmental, social, and governance (ESG) enjoyed more than double the amount of share price appreciation as those with low scores, according to data provided by Harvard Business school.
As advisors face challenges in retaining clients in today’s competitive climate, impact investing, driven by a client mandate to align investments with their social values, is vital to forging deeper relationships with more meaningful outcomes. Being properly equipped with the will, knowledge, and ability to satisfy their clients’ need for impact investing can position advisors ahead of the curve in expanding their practice, deepening client relationships, and delivering higher-quality portfolios to foster better client outcomes.
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.