‘Your impact investing journey’ is sponsored by Tiedemann Advisors. This series will explore the role of a financial advisor in helping clients navigate the many steps involved in building and maintaining an impact investing portfolio. The primer focuses on the essential topics and questions that are top of mind for high net worth individuals, family offices, foundations and other investors when starting out on their impact investing journeys.
With so many ESG and impact funds now available to investors, and more fund launches virtually every day, it can be easy for an investor to feel overwhelmed by all the options. Recent estimates from Morningstar show that there are more than 3,000 sustainable investment funds currently in the market, on top of hundreds of private investment funds that are currently only accessible to accredited individual investors or financial institutions.
While all this product development is a positive sign of growing investor demand for impact investments, there is a downside. Just like with any nascent market, there will be investment firms that have a well-articulated impact investment thesis and there will be firms that haphazardly slap the “impact” label on their products in order to appease investors and raise assets. This dichotomy between the leaders and the pretenders has led to some understandable handwringing and negative headlines for the impact investing industry, which continues to be subject to skepticism and criticism from all sides. It’s no wonder that investors struggle with telling the difference between a firm living up to its promise and a firm engaged in impact-washing.
At Tiedemann, we spend a lot of time on due diligence to make sure our clients’ capital is allocated into high-quality, institutionally-oriented investment funds employing truly impactful outcomes. This commitment to institutional-quality investment choices is part of our mission to “scale with integrity.” We have investment research experience across all asset classes, including both public and private markets, and we have a long track record of conducting due diligence on both traditional investments and impact investments.
Every advisor approaches manager due diligence in a slightly different way depending on their previous experiences and what they think defines success for a fund manager. For us, we look for fund managers that share the following characteristics:
- Managers who specialize in areas where market inefficiency and potential for outperformance is greatest (e.g., esoteric asset classes or illiquid strategies)
- True boutiques, which we define as employee-owned firms with focused product offerings and significant partner capital invested alongside their clients’ capital. This shows us which firms not only talk the talk, but also walk the walk.
- Low fees and performance-based fee structures that show an alignment of interests with investors, particularly as it relates to impact incentives
- Concentrated, high-conviction active managers with complementary styles and uncorrelated investment strategies
- Strategies that show proof of a repeatable process demonstrated over an extended period of time, rather than recent returns. This is an especially important consideration for managers with recent fund launches that may not yet have a lengthy track record.
We believe these unique characteristics allow us to separate the high-quality managers from the low-quality ones, and it helps us steer clear of any potential greenwashing or impact-washing in the market.
While it is true that there are more funds and investment options than ever within impact investing, it’s important to remember that not all funds are created equal. Just like with traditional fund managers, there are top-performing impact funds and low-performing impact funds. Our priority is matching our clients’ interests and values with a customized portfolio suited to their needs. In some cases, this may mean partnering with traditional asset managers to seed or develop a customized impact offering in areas under-served by impact investors.
With the impact investing market continuing to grow at a rapid rate, those advisors and consultants with proven experience conducting manager due diligence are most likely to stand out.
Brad Harrison is a managing director at Tiedemann Advisors.
Tiedemann Advisors is an investment advisor. This information is intended only as an illustration of the services offered by Tiedemann, and is intended to serve as the basis of a discussion with a Tiedemann professional. This information is not designed for any particular client or type of client, and Tiedemann’s services may not be suitable for all clients. You should consult with your tax and legal advisors prior to entering into any wealth planning or trust arrangements.
