“Performance appears to be better in bear markets,” says Casey Verbeck, a director at San Francisco-based Veris Wealth Partners, a registered investment advisory and certified B corp that builds impact portfolios for clients. “It seems consistent that way for a long time. Businesses with CSR and ESG best practices are simply more efficient,” says Verbeck.

 During the recent financial crisis, sustainability-focused companies outperformed their peers, according to a 2009 study by management consulting firm A.T. Kearney. This “performance differential” translated to an average of $650 million in market capitalization per company. The researchers concluded that investors might have rewarded companies that focus on long-term health rather than short-term gains; demonstrate strong corporate governance; implement prudent risk management practices; and invest in “green” innovations.

But Emerson says the best performance data may be hard to come by, as most impact funds operate in private markets and have no disclosure obligations. “Those analytics are often inside firms that are using that information to drive their strategies. There is very good, practical data. But firms are not going to publish it,” says Emerson, who recently co-authored a book, The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism, that profiles 12 of the top-performing private funds around the world.

Despite the progress the industry has made, the World Economic Forum warned in a December 2014 report that “there is a shortage of expertise, tools and frameworks to enable engagement.” Ironically, the report contains a comprehensive list of resources, including recommended readings, networks and membership associations, forums and conferences, investment opportunities, impact measurement tools and family office networks and forums.

Another frequently raised objection to impact investing involves advisors’ concerns about violating their fiduciary duties.

Some say the failure to consider impact, SRI and ESG criteria should be a bigger concern for advisors and asset managers. “Being a good fiduciary is about more than making money,” says Emerson. “If you’re managing assets for a long-term horizon, and you’re not thinking about how off-balance-sheet risks affect performance, that’s just not good investing. You can set aside any conversation about ‘responsibility’ or ‘impact.’ It’s just fundamentally bad investing to put money into business strategies that are at risk on terms that you’re not considering.”

Getting Started
Blueprints abound for advisors who want to help clients transition to impact investments. A good place to start is ImpactAsset’s first (of 13, so far) issue brief, Invest with Meaning: An Introduction to a Unified Investment Strategy for Impact. Sonen Capital’s report, Evolution Of An Impact Portfolio: From Implementation To Results, discusses how the KL Felicitas Foundation repositioned its assets. Total Portfolio Activation: A Framework for Creating Social and Environmental Impact Across Asset Classes by nonprofit organization Tides and Trillium Asset Management is another resource.

Emerson says the first step usually involves assembling a team to help guide the transition. For those with substantial wealth, he says it can take a year or more of working with their financial advisors to identify asset managers who can help the clients achieve their strategic vision. Advisors and clients can accelerate the learning curve by joining networks of like-minded investors, such as The ImPact, Toniic and Investors’ Circle.

Moving cash is a good first step. Emerson says clients can get similar financial returns, with impact, by redirecting money to local or regional banks and credit unions. As long as banks are FDIC-insured and credit unions are NCUA-insured, there shouldn’t be any additional risk in moving cash from entities that may be financing activities of which clients disapprove.

“Municipal bonds are also fairly impactful vehicles. They help build infrastructure and schools,” says Emerson.

After cash and municipal bonds, he suggests that advisors move one or two of the “worst” legacy investments to impact-oriented funds, then help clients develop a longer-term strategy to transition the rest of the portfolio.

Verbeck says that Veris Wealth Partners takes care to transform traditional portfolios in a methodical way and to work with clients’ accountants, estate planning attorneys, philanthropic advisors and other professionals to time asset liquidation to minimize taxes and manage capital gains. He cautions that some legacy investments, such as hedge funds and private equity vehicles, can take several years to unwind, especially if there’s a lockup period. Sometimes new infrastructure needs to be created before assets can be moved. For example, clients may want to set up a new trust to house the impact assets.

Emerson says many first-generation family members are using the topic of transitioning to 100% impact portfolios as a way to re-engage with the second and third generation about the meaning and purpose of capital and their family values. And advisors should pay close attention.

He’s aware of families with hundreds of millions in assets who’ve abandoned decades-long relationships with advisors because the families concluded that those advisors were unable to deliver the types and scales of impact the families wanted.

“The greatest threat to traditional wealth managers and advisors is that some have a huge, ideological blind spot around the possibility of managing capital for financial performance with impact,” says Emerson. “By not being aware of that blind spot, they’re open to significant risk.”

“People can talk about this as ‘hype’ and ‘new’ and ‘risky,’ but money will—especially when you put millennials into the conversation—continue to flow out of traditional strategies that are managed with no consideration for impact,” says Emerson.

Indeed, almost one of every six dollars under professional management in the U.S. is now invested in vehicles and strategies that consider impact, according to the latest US SIF report.

“This is not a fad. It’s a trend,” says Emerson. “Advisors need to position themselves to be part of the trend and to benefit from it going forward.”

Clients Who Went ‘All In’
Client “A”
   One of Veris Wealth Partners’ newest clients is a woman in her early 70s who’s passionate about addressing climate change and protecting endangered species. She carved out an initial 25% (about $3 million) of her family foundation’s assets to invest for impact and plans to transition all the foundation’s assets to impact investments in the near future.
   Most of the equity funds selected for the client are fossil fuel-free and several engage in high-profile shareholder advocacy focused on the sustainable sourcing of palm oil to protect original rain forest habitat. The client also holds a promissory note that helps female coffee and cocoa farmers in Africa and Latin America grow their crops sustainably with stable prices.

Clients “B” and “C”
   A mother-daughter duo came to Veris Wealth after the daughter heard the firm’s chief investment officer speak at a philanthropy conference. While the daughter initiated the conversation about impact investing, the mother entered into the conversation after the firm back-tested its proposals and demonstrated competitive financial results.
   These clients are transitioning assets to the firm that will eventually be fully invested for impact. The 30-something daughter has already transferred all her personal and trust assets to the firm (about $5 million). The mother transitioned her $20 million family foundation at the end of December and plans to move her personal assets this year.

   In leaving a decades-long private banking relationship at a top-tier U.S. bank, the mother said a key motivator was the opportunity to increase the impact of the family’s philanthropy with investments consistent with their foundation’s mission of environmental conservation. To further the clients’ impact goals, the firm selected fund managers that invest in low-carbon and fossil fuel-free businesses, as well as in the promissory notes of a community development financial institution that stabilizes urban neighborhoods.


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