By Jerilyn Klein Bier
More wealthy investors are starting to explore impact investing, and demand for such investments is expected to surge.
Impact investing is commonly referred to as investing that targets both environmental and/or social impact and financial returns. The concept casts a wide net, with investments involving microfinance, community development and social enterprises attracting particular interest. Other sectors provide access to energy, sustainable forestry and agriculture, health and education, affordable housing and so-called bottom of the pyramid investing, which refers to the portion of the global population earning less than $3,000 a year.
Dismissing or resisting clients' interest in impact investing isn't likely to bode well, says Julia Balandina Jaquier, a Zurich-based impact investment expert who has researched motivations and practices of over 40 high-net-worth individuals and family offices involved in impact investing
A number of HNWIs and family offices talk about their impact investing strategies in Balandina's recently published Guide to Impact Investing for Family Offices and High Net Worth Individuals, a 200-page paperback resource filled with guidelines, tools, case studies and stories. Some of the people profiled in the guide say they're irritated by lack of responsiveness to their impact investing goals from their traditional advisors, and some have even switched advisors as a result.
Balandina says she expects demand for impact investing to grow both from the generational shift and from mounting evidence that it can help wealth holders achieve both financial and non-financial objectives.
She recently spoke with a young philanthropic family which, having faced continuous resistance from its advisors on including impact investing in its personal and foundation portfolios, is now changing its investment mandate to specifically include family values. For them, impact investing is part of their family values and they want their wealth managers to take fiduciary duty for this.
"If their current advisors cannot demonstrate their ability to meet this broadened fiduciary duty, this family is prepared to take their money away, which will result in a loss of several hundred millions for their current wealth manager," Balandina says.
She notes that impact investing is a great opportunity for advisors to differentiate themselves from peers, attract fresh assets particularly in the ultra-high-net-worth segment, and create a more personal and client-centric relationship with existing clients.
Broad And Complex
Balandina advises financial institutions, wealth holders and the Swiss government on impact investment strategies, and also teaches at the University of St. Gallen, one of Europe's leading business schools. She acknowledges that the young, fragmented impact investing market is challenging to understand and approach, and that the lack of a common definition makes it hard to determine its size.
She notes that market size estimates range from $50 billion (Monitor Institute, 2009) to $297 billion (AlphaMundi Group, 2010). The Monitor Institute, for one, has projected the market to grow to $500 billion by 2019.
Balandina says impact investors can choose from among a variety of investment options including a cash deposit in an FDIC-insured community development bank, a well-diversified impact fund of funds, or microfinance debt products with 10-year track records. This product breadth has, over time, allowed some of the wealth holders profiled in her guide to allocate more than 70% of their overall assets to impact investing without deviating from their strategic asset allocation.
Return on investment can vary greatly. For example, the RSF Social Investment Fund, a diversified, direct loan fund comprised of over 75 leading nonprofit organizations and for-profit social enterprises, has had an average annualized rate of return of 4.1% since its 1984 inception. Other investments that emphasize financial returns before impact have had double-digit internal rates of return.
Still, impact investing is a complex area where social and financial aspects have to be properly analyzed and managed, the transaction costs are high and many opportunities are illiquid, says Balandina. So how can you help clients?
You don't have to become an expert in impact investing, but you should be able to understand the challenges and potential solutions well enough to point clients in the right direction. Some takeaways from Balandina:
Recognize motivations. HNWIs and family offices cite a variety of reasons for embracing impact investing such as a wish to integrate personal values and investment principles, create a legacy for future generations, enhance effectiveness of philanthropy and strengthen family bonds. Find out whether your clients would like their values to be reflected in their portfolios, their specific areas of interest, how engaged they wish to be, their appetite for risk, and their expectation of return on these investments.
Do your homework. Balandina lists in her guide a dozen recent reports on impact investing from various sources, as well as ongoing industry conferences such as SOCAP (Social Capital Markets), PYMWYMIC (Put Your Money Where Your Mouth Is Community) and TBLI Group (Triple Bottom Line Investing), among others. You can also read about how HNWIs have structured their activities, where to find the deals and how to analyze them. Some deal origination and/or trading platforms include Gate Impact, Mission Markets, Impact Assets and Impact Partners.
Support rather than resist. Even if you decide not to get involved in impact investing yourself, respecting the desires of your clients and providing them with help will position you as a true partner. It can be simply linking them to sources of information or peer investor clubs, such as Toniic, PYMWYMIC or Go Beyond.
"If the wealth holder has decided to do impact investing, he or she will eventually find a way to do it, with or without their advisor's help," says Balandina. "But clients often do not have time or skills to apply sufficient rigor in analysis and structuring of such investments. The role of advisors in supporting them in this activity and bringing the financial skills and risk management is critical."
With some education and ongoing effort, you can help clients make an impact. And you may be able to make an impact on your practice.
Information on Balandina's guide can be found at www.guidetoimpactinvesting.net.