‘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.
The biggest question on the minds of many investors these days is how to use their capital to create positive social and environmental impacts. From family offices and high-net-worth individuals to foundations and endowments, it seems everyone is talking about, or doing, impact investing.
Impact investing is one of the fastest growing areas within the financial services industry, and specifically the wealth management industry. Recent estimates from the Global Impact Investing Network (GIIN) estimate that there are more than $500 billion in impact investments globally, and the latest report from the Global Sustainable Investment Alliance (GSIA) claimed that worldwide there is as much as $30 trillion in sustainable, responsible and impact (SRI) assets.
Inherent in this growth in assets is a clear market signal – investors want more. Study after study has shown that investors want their capital to generate a positive social and environmental impact, not just competitive financial returns. This is particularly true of women and millennials, who will soon be the recipients of an estimated $30 trillion wealth transfer.
But impact investing isn’t for the faint of heart. Like with any nascent market, there is a wide variety of approaches and strategies to choose from. There are already thousands of funds claiming that they employ an ESG or impact investing strategy, with more fund launches practically every day. For instance, asset managers launched a record 382 “socially conscious” mutual funds and exchange-traded funds in 2018, bringing the total number of such funds to 3,160, according to data from industry tracker Morningstar. On top of this, there are also hundreds of private investment funds that incorporate ESG or impact into their investment processes, spanning investment structures and sectors such as hedge funds, private equity, venture capital, real estate and infrastructure.
The bevy of options is enough to make even the most sophisticated of investors pause before making an allocation. Building a diversified investment portfolio is hard enough as it is, but incorporating non-financial outcomes adds another layer of complexity to the due diligence process, especially since only a handful of impact funds have a long enough track record for investors to analyze and verify. This means it will be challenging for investors to separate the high-quality fund managers with the most potential for future outperformance from the low-quality fund managers who have just been riding the historic bull market. There is also the active versus passive debate to consider, a debate that will only become more heated if and when the market takes a turn.
Fortunately, investors don’t have to face these challenges alone. There are a growing number of consultants, financial advisors and data providers that cater to impact investors of all shapes and sizes, each with their own area of expertise. For those new to impact investing (or those looking to take an extra step), a financial advisor can help investors navigate this rapidly maturing—and increasingly complex—market.
Of course, there are also countless financial advisors to choose from, some of which have a long history of helping clients integrate responsible investing programs and some of which are still in the early stages of building out their capabilities in impact investing.
This raises the obvious question – what should impact investors look for in a financial advisor? For example, investors looking for a prospective impact advisor may want to know:
- How long has a firm been active in impact investing and what relevant experiences do the individual financial advisors have in the environmental or social sectors?
- What percentage of a financial advisors’ assets are invested for impact and in which asset classes?
- Is there a separate team of impact specialists or is impact integrated across the ethos of the entire organization?
- Does the advisor have experience impact investing in different asset classes across a range of social and environmental outcomes?
- Does the firm offer comprehensive and integrated impact reporting that is consistent with industry best practices?
- What is the governance structure of the firm? Is the impact business sustainable and consistent with their broader strategy? Does the firm manage their own products? Is the firm a signatory to various initiatives?
To answer these and other questions, we have created a three-part guide to help investors along their impact journey. In this series we will also cover:
- How an advisor can help you align your investments with your values;
- The importance of due diligence in evaluating impact investments; and
- Tracking, measuring and reporting the impact of your investments.
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.