Beats | November 20, 2018

Eight questions to ask when choosing an impact investment advisor

Stephanie Cohn Rupp and Brad Harrison
Guest Author

Stephanie Cohn Rupp and Brad Harrison

Not long ago, an impact investor was almost a pioneer, venturing into new territory fraught with the specter of sacrificing financial returns to achieve beneficial social and environmental outcomes.

The idea that shareholder returns over the long term could be maximized by embracing an expanded sense of responsibility toward the planet and fellow humans seemed outside the parameters of investment management and its rigorous calculus around risk-adjusted returns.

Today, asset owners are more likely to accept the idea that impact portfolios can meet or exceed broad market performance, both on an absolute and a risk-adjusted basis. Coupled with growing interest in big challenges, such as  climate mitigation, and social issues, such as affordable housing and gender equity—this awareness has triggered a surge in demand for ESG (environmental, social and governance) strategies and products that support them.

Impact-oriented investors can now choose from more than 1,000 funds ranging from the broadly focused ESG to the narrowly thematic (e.g., sustainable food and farming, carbon reduction, financial inclusion, etc.).

There are green bonds for financing environmentally friendly projects as well as investment vehicles for targeting particular communities, business models or public health issues. Investors seeking impact across a full range of asset classes can find private equity funds focused on sectors and markets traditionally underserved by institutional capital and private credit products targeting niches such as clean energy and water infrastructure.

Combined approach

In this evolving milieu, an advisor versed in the nuances and prerogatives of impact investing can add meaningful value. Commoditized, formulaic advisory services often don’t suffice: impact investing can be  a highly personal endeavor that requires asset owners to think deeply about how portfolios should reflect their values and intent. Translating impact preferences into practical portfolio strategies requires that combination of conventional approaches focused on risk and return with specialized due diligence and monitoring capabilities that incorporate criteria outside the scope of traditional advisor-client relationships.

Before embarking on a search for an advisor, it helps to clarify one’s needs. Some investors test the waters by gradually incorporating impact allocations. Others start with a specific amount of money to dedicate to impact. Others intend to transition all their investments to impact over time.

Those who limit their approach to “negative screens” to identify and screen out potentially problematic holdings from an existing portfolio don’t necessarily need an investment advisor steeped in impact. Nor is a high degree of impact expertise required to invest a portion of assets in  a single generic ESG or impact strategy.

But investors wishing to achieve impact across asset classes and investment styles, with a certain theory of change or thematic preference for investments in, say, education or gender, require a higher level of expertise in sourcing and evaluating opportunities.

Eight questions

Typically, investors looking to transition to impact are already informed about issues relating to ESG. They  are looking for sophisticated advice and deep knowledge from their advisors. They want not just a great investment strategist and facilitator, but an engaged collaborator with a keen grasp of environmental and social issues. Ideally, advising on impact investing isn’t just another required service but a reflection of an advisor’s core mission and values.

What kinds of diagnostic tools do you use? Investors new to the impact space can benefit from retaining an advisor with diagnostic tools for discovering and prioritizing motivations and values. Experienced advisors understand the value of developing a unique impact investor profile based on a clear elaboration of values, impact goals and risk/return preferences. This process should evolve into an impact investment policy statement,  that translates preferences into both impact and financial targets and spells out objectives, policies and decision-making procedures governing investment-related activities. For foundations, a robustly conceived impact policy statement is often critical to ensuring a shared understanding among staff, the board and investment advisors.

Can you help with mission-related investments? Investors who are already active philanthropists may come to the table with a clear sense of direction. Charitable donations are often good proxies for values and can point the way to mission-related investments. An engaged impact advisor will help clients think strategically and holistically, aligning investments and philanthropy to maximize impact in specific areas of interest. If a client is considering an investment offering with a concessionary (below market-rate) return, an advisor should be equipped to help gauge whether the anticipated impact justifies the rate of return.

Do you integrate impact and financial reporting? Prospective clients should be mindful of experience and authenticity when selecting an impact advisor. Firms that know their way around impact typically are able to build highly customized portfolios based on multiple choices across asset classes in a range of targeted returns. Ask for sample impact policy statements and related examples of impact portfolio construction and reporting on results. Outcomes should be reported via a fully integrated platform that offers both qualitative and quantitative analysis of the impact of specific holdings (i.e., measurement of social and environmental benefits realized) alongside standard financial reporting and portfolio-wide assessment.

What percent of your assets under management are invested for impact?  When speaking to prospective firms, ask what percent of the advisory firm’s assets under management are invested for impact—and whether the firm provides values-based investment solutions for a variety of portfolio types (endowments, private foundations, community foundations, public trusts, nonprofits). Inquire about how the impact function is staffed internally and who would be part of the advisory team.

Who will be my primary relationship manager?  Try to understand who your primary relationship manager will be – the lead investment professionals and any others who will be servicing your account. This will help you gauge whether their skill-set and interpersonal skills fit with you and your family, or your foundation staff.  In general, get a minimum of three client references to better understand how the team would work with you and your family.

How do you structure fees and compensation? Understanding fee structures and how advisors are compensated also is critical. Some firms offer proprietary impact investment products (spanning public market solutions, including stocks and bond products and private market solutions, including private equity and venture capital funds). There are pros and cons to each. Some clients may appreciate the ”all under one roof” approach;  others may feel uncomfortable with the potential conflicts of interest (real or perceived) in working with firms that populate portfolios with their own financial products. .

Firms that only offer advisory services, in theory, have more of an arms-length relationship with fund managers, providing an arguably  more objective view across products, as well as the ability to terminate relationships at any time. Pure advisory firms should have impartial insights into “best-in-class” managers representing a variety of investment styles across asset classes.

How do you manage for impact post-investment?  Impact investing requires an expanded toolkit to gain insight into the ramifications of investments and tackle problems from different angles. This means accessing external resources that collect and analyze ESG data—not an easy task, given the inconsistencies in how companies report ESG. Third-party organizations can  bring together like-minded impact investors to promote their interests to managers of publicly traded companies, vote proxies and co-file corporate resolutions on mission-aligned topics.

Asset owners need to get a sense of what tools and resources a prospective advisory firm has at its disposal to leverage impact and amplify clients’ voices through shareholder advocacy. Advisory committees and strategic partnerships with organizations dedicated to impact investing can help advisors stay at the forefront and provide a wealth of knowledge and insight on best practices for their clients.

As more advisors enter the impact arena, weighing experience and the ability to nurture relationships is key. We also encourage asset owners to consider the cultural fit of each firm. Considering how important a long-term, productive client-advisor relationship is in terms of achieving impact goals, investors owe it to themselves to take their time when sizing up prospects.

Stephanie Cohn Rupp and Brad Harrison are managing directors at Tiedemann Advisors. Stephanie over­sees the devel­op­ment of the firm’s impact invest­ing ser­vice offer­ing. Brad leads the firm’s environmental strategy as well as having respon­si­bil­i­ty for man­ag­ing client rela­tion­ships, pri­mar­i­ly work­ing with foun­da­tions, endow­ments and non­prof­it orga­ni­za­tions.​