Virtus takes a proactive approach to potential disruption, said Strong. Because the firm invests only in cycle-resilient properties, its strategies tend to tilt towards real estate that is used to meet social needs or fits major demographic trends, like the expansion of university enrollments or the retirement of the baby boomer generation.
“We ended up as ESG investors automatically without really programming it,” said Strong. “We do end up really paying attention to the ESG element in our real estate. ESG doesn’t just sit on the shelf. We live it every day.”
Nevertheless, Virtus fist considers investment performance when building a portfolio, said Strong, because investors are still prioritizing returns. If a portfolio doesn’t perform well, most investors will still want to get rid of allocations that are responsible for the poor showing, regardless of whether they create a social or environmental impact.
Mudaliar disagreed, arguing that a significant segment of investors claims to have goals other than maximizing their financial returns.
“The research, starting from years ago, shows that impact investing strategies can produce attractive returns, but not all investors seek to generate comparable returns,” said Mudaliar. “Every day we ask the question ‘What sort of returns do you seek?’ and roughly 60 percent of investors say they want risk-adjusted market returns. That means many would accept actual returns that are below market returns. Not everyone pursues competitive returns.”
Investors might be interested in difficult business opportunities that do not have great potential for growth, or may want to develop markets where one doesn’t yet exist, noted Mudaliar. Others might want to act as a bridge between investment and philanthropy and be satisfied with muted returns if their money was also supporting a favorite cause.
The biggest game changer will be more accurate and transparent measurements of impact and the individual investor’s ability to hold their investment managers to preset targets for impact outcomes and metrics, said Mudaliar.
“We’re already starting to see innovative funds set up like that, with compensation determined by returns and the ability to meet impact targets,” said Mudaliar.