Co-authored with Kim Wright-Violich, Tideline
Nine out of the top 10 largest U.S. asset managers are now active in impact investing, according to new Tideline analysis. All but Vanguard, the second largest US asset manager, have stood up or are actively testing impact investing strategies.
Of the top 20, Tideline finds that half are active in impact investing, up from fewer than one-third five years ago — providing further evidence of growing demand from clients, but also of a market still in the early phases of institutional adoption.
Investment managers have been schooled in monitoring primarily financial risk and return for generations. It should come as no surprise many are still withholding judgment on impact investing, even while continuing to pursue efforts to further integrate environmental, social, and governance (ESG) factors into their investment decision-making and offering more socially responsible investing (SRI) options.
The degree of involvement among these top managers is varied. For example, BlackRock had just started exploring impact investing in 2012. By 2014, the firm had launched a dedicated impact investing division, BlackRock Impact. In 2012, State Street Global Advisors had shown little interest in impact investing, but in 2016 began testing the water by launching an exchange-traded fund that focuses on gender diversity by investing in public companies with high levels of senior female leadership and directing a portion of the fund’s revenues to nonprofits developing girls as leaders in business and science. Goldman Sachs took a buy-versus-build approach in 2015, acquiring Imprint Capital, an early impact investing boutique.
Rounding out the nine are Fidelity, J.P. Morgan Chase, Bank of New York Mellon, Capital Group, Prudential Financial and Wellington Management, which all now have either dedicated strategies or are actively exploring their own impact approach.
First, larger firms have moved more aggressively to establish impact investing strategies than their smaller peers — our analysis shows that, over the past five years, there has been minimal growth in the number of asset managers in the bottom half of the top 20 exploring impact investing, while all but one of the top 10 firms have established impact investment programs or are actively considering or testing impact strategies. We believe a few dynamics are at play. Larger firms have a bigger brand and corporate reputation to protect; they have deeper pockets for R&D; and, with client and asset retention front of mind, making relationships stickier through innovation is critical, even if just serving a niche. Of course for larger firms, niche client segments can be big enough to make for sustainable business propositions, which is not always the case for smaller firms.
Second, investment managers housed within large, diversified financial institutions — alongside wealth management businesses — have almost uniformly embraced impact investing. This is a direct response to demand for impact investing from high net worth clients. Clients ask wealth advisors for access to impact investing. Wealth advisors turn to their proprietary investment management units for product. The surge in activity at wealth management firms has been the most defining commercial trend in impact investing in the past five years.
Third, knowing that institutional clients anchor asset management businesses, the fact that seven of 20 have yet to express interest in impact investing suggests these larger investors are coming to the market much more slowly than naturally inclined audiences like high net worth individuals. And so long as institutional asset owners largely remain on the sidelines, the business case for asset managers will be mixed. In coming years, field-builders will need to make a strong case for impact investing to relatively more skeptical audiences.
For many impact investing practitioners, the subdued embrace by the largest US asset managers may seem inconsistent with the 18 percent annual growth rate of assets reported by the GIIN and the more dramatic arrival on the scene of new specialized managers like TPG RISE and Bain Double Impact.
Still, for asset management executives at the largest firms, accustomed to methodical thinking, the shift in the last five years would be understood as nothing short of momentous.