The supply of impact investments is catching up to investor demand.
The experiences of members of Toniic, an impact investing network, suggests impact investors are moving beyond private equity and creating portfolios diversified by asset class similar to traditional asset allocation. The message of a new report on their performance: full portfolio alignment with impact is possible today.
The report covers 51 investors worth $1.65 billion who have deployed nearly 70 percent of this amount across asset classes, geographies and sectors. Roughly eight in 10 expect market-rate returns and an equal amount reported that their expectations were met or exceeded, meaning a clear majority of investors at least believe they are achieving market-rate returns.
Charly Kleissner, a longtime champion of impact investing and co-founder of Toniic said the report created an evidence base for investors seeking to align 100 percent of their portfolios with positive social and environmental impact. Kleissner heads Toniic’s 100% Impact Network.
“We believe the results of these efforts will make an important contribution to developing the new financial system, a system that will have positive impact at its core,” Kleissner said at the network’s year-end meeting in London last week.
Lisa Hall, managing director of impact investing with Anthos Asset Management and a Toniic board member, noted that impact opportunities in liquid asset classes – fixed income and public equities – are growing in both developed and emerging markets, and several asset managers, such as Triodos Bank and resposAbility, have established long track records. Active ownership (e.g. shareholder engagement) and collaboration with traditional asset managers are key to expanding the scope of impact universe, she said.
Traditional asset managers are adding impact products. Boston-based Wellington Management, with nearly $1 trillion in assets under management, integrated environmental, social and corporate governance (ESG) factors into the firm’s investment decision-making process. The Global Impact Investing Network research shows an increasing diversity of impact investing products meeting the needs of larger and more specialized investors.
Value alignment across asset classes is possible today. The range of impact products on the market is growing, allowing investors to meet a range of liquidity and risk and return requirements. Private equity represented a larger allocation (21 percent of participating portfolios) than fixed income (19 percent) and less than public equities (29 percent).
An exception is hedge funds, for which there are not yet good impact options. A recent report by Deloitte explains why hedge fund managers should consider the impact space.
Impact expectations can be met. Nearly nine in 10 participating investors have either met or exceeded their impact objectives. “When people talk of a tradeoff between social goals and financial returns, in fact, there is no tradeoff. You can do the right thing, care for people and still have financial gains,” Bob Pattillo, Founder of Gray Matters Capital, an impact investment foundation.
Impact investing is not just for wealthy millennials. Baby boomers make up the majority of study participants, and, in the last two years, the fastest growing group within the 100% Impact Network has been individuals with single-digit million dollar portfolios. For all the talk of the millennial wave, most millennials either haven’t come into wealth yet or don’t have the decision-making power.
Impact portfolios can be constructed across both developed and developing markets. There are many impact opportunities present in developed countries. Respondents living in Asia Pacific, Europe and US and Canada invested roughly half in their own region and half outside. Many Toniic members invested in companies that tackle local needs. Resonance National Homelessness Property Fund, for example, buys properties and rents them to homeless people in UK’s cities. Auticon, a German consultancy, provides IT training and secures steady employment for people with autism.
Investment advisors matter. The universe of impact opportunities has grown in the recent years and a knowledgeable advisor can help investors to navigate it. Remarkably, some investors with the help of their advisors were able to move to 100 percent impact portfolios within the first two years.
Participating investors who work with financial advisors appear to have more diversified portfolios with significant public equity and fixed income asset allocation. Investors handling their own investments tend to have a heavier focus on cash and equivalents, real assets and private equity.
Photo by: Anna Dziubinska.