Imagine a future where advisors and asset managers’ compensation would depend on their ability to create non-financial impacts on the world with their clients’ assets.
Advisors have probably come across futurists who say, eventually, almost every investment will be made with a social or environmental impact in mind as well as a financial return. Most advisors have also heard predictions that performance-based fees will soon become the norm in investment management.
At “The Future of Things,” a Monday panel discussion at Financial Advisor’s 8th Annual Inside Alternatives conference in Denver, panelists linked the two concepts. In 40 years, advisors and asset managers will be paid not just on financial reutrns, but on the ESG impacts they make, according to Abhilash Mudaliar, research director for the Global Impact Investing Network.
“There are several drivers behind this vision: changing social norms—people are more connected with the consumption and investment choices that they make,” said Mudaliar. “These changing norms are being driven by millennials and women, but they’re being felt more broadly.”
Mudaliar also argued that impact investing leads to better businesses, as sustainable practices create more efficiencies, and social responsibility and sound corporate governance reduce labor and litigation risks.
Institutional investors are also driving demand for ESG opportunities, especially in private funds, said Mudaliar, as they seek managers who can fulfill responsible investing mandates.
“The question now becomes, what needs to happen to realize this vision of the future where it’s the new normal to integrate environmental and social considerations into investment decisions?” said Mudaliar, who believes that better impact measurements; better definitions and segmentations of ESG, socially-responsible and impact investing; and more publicly available strategies and products will lead to the normalization of ESG strategies.
Rising interest in creating ESG impacts, along with technological disruption, will greatly alter the investment universe, said panelist Will Strong, chief financial officer for Virtus Real Estate Capital.
“Some of the technologies, like batteries, solar power, electronic and automated vehicles, interconnectivity, they all will have extraordinarily big impacts on real estate,” said Strong. “Gas stations, office buildings, parking, residential space—you may not need a garage or a car anymore. We’re thinking about all these things, looking forward and undertstanding where the changes are going to be.”
Malls, for example, are likely to continue to fail as more consumers are choosing to shop online, said Strong.