Clients often take us down unexpected roads, requiring us to develop a new expertise in such things as real estate financing or flex our muscles on complicated trust or transfer issues. Sometimes they require us to be counselors and trusted confidantes on family issues.
Our clients’ complex needs also require us to be creative with investment solutions so they can fund retirement, pay for a lifestyle, educate their children, travel or whatever else they want to do. But what if a client wants to generate returns while also improving social and environmental conditions? So-called socially responsible investing—impact investing—is still an evolving terrain, one that takes many advisors out of their element.
That was certainly my case when our firm was asked by several families to help them with mission-based investing. I previously thought the best way to change the world was to be a good person, give of your time and use investment gains for philanthropy. I believed that socially responsible investing posed challenges and limitations, rather than opening up an avenue. To my unenlightened mind, an investment or two in some feel-good green partnership might be tolerable, but the bulk of a client’s portfolio needed to have a traditional look and feel if he or she wanted competitive market returns.
But times are changing, and so are the perceptions and realities about impact investing. First, the impact investing movement is not just a trendy fad catering to the whims and eccentric demands of the politically passionate wealthy. Impact investments fill a much-needed void, especially now that cash-strapped governments can no longer afford to intercede in social issues (and maybe they never did a great job anyway). Social networks have created a growing and active global dialogue about the world’s social problems, turning the intangible into the tangible, allowing people to make a real and demonstrable impact on a local and global level. Furthermore, in this increasingly competitive global marketplace, it is clear that the best new market opportunities will be those in which an investor can also successfully tackle society’s many challenges. So providing investment capital for this new generation of business and socially savvy entrepreneurs makes both good philanthropic and business sense.
Finally, traditional philanthropists are impatient in the face of intractable and increasingly visible environmental damage and poverty. They feel that even though they have given their time and money, they have failed to make a meaningful dent in the world’s problems. A new approach is needed, one that ties investment capital to social good, to spur change.
It helps that there is now a much bigger and viable set of impact investment opportunities.
Seeing The Impact
Our clients want to see the evolution of their allocation to green and socially good investments. In this pursuit, they can use tools like IRIS (the Impact Reporting and Investment Standards), which offers a standard set of performance measures for describing social and environmental performance, allowing the clients to compare the impact data across investments.
Rigorous metrics like these give them a surer footing when it comes to more broadly allocating to socially responsible investments across the spectrum: At one end are investments with negative screens that weed out undesirable activity. At the other end are investments that directly create a desired social and environmental impact—typically through venture capital, private equity or some form of lending. In the middle are public equity investments that allow investors to get involved through shareholder advocacy and bond investments that finance alternative energy and community development.
Clients can invest across the spectrum according to the impact they want to have, their liquidity constraints, their time horizon, their risk tolerance and their return objectives.
ws clients to participate with multiple portfolios across different generations and realize the true power of philanthropy. We do this by creating a pathway. Clients start by investing dollars in well-capitalized companies with good corporate values. Then they move on to companies creating social change or correcting social injustice. After that, they can loan money to, say, an isolated farmer or perhaps a single mother struggling to get her small business connected to the global supply chain. At the very end of the pathway, they can create grants or gifts.
A family’s impact investment can be a wonderful source of pride. Even after the risk tolerances, liquidity and income needs of different family members are accounted for, an advisor can create a coherent thesis for social and environmental change by using a continuum of this sort of social investing. Every relevant portfolio within the relationship plays its part, and the overall consolidated asset allocation will ultimately encompass everything from negatively screened investments to microfinance to private equity.
A powerful byproduct of this approach is the opportunity it creates for a dialogue to educate future generations and aid the legacy planning of older generations. An impact investment continuum such as this also reflects the evolving landscape of the space itself. The good investments are not limitless, but more and more socially and environmentally beneficial opportunities with financially competitive metrics are emerging day by day.
As Dr. Martin Luther King Jr. once said, “Although social change cannot come overnight, we must always work as though it were a possibility in the morning.” Advisors, clients and the community at large would do well to heed the wisdom of these words, and continue to move forward one step on the continuum at a time.