Working for a firm that is committed to growing the impact investing marketplace, a lot of my time is spent meeting with financial advisors—both independents and those affiliated with specific brokerage platforms—to help achieve this goal. From these meetings, I’ve observed that while many of today’s advisors are familiar with ESG mutual fund and ETF offerings, they are largely unfamiliar with the much wider spectrum of investment products that are available across asset classes in impact investing. And that’s a problem.
Why? Well, beyond the world needing more urgent action to solve its challenges, it’s also an issue because investors are increasingly looking to their advisors for help getting started in impact investing and not finding it. In fact, a recent study by the Rockefeller Foundation found that investors see their financial advisors as roadblocks to accessing impact investing opportunities citing “difficulty sourcing credible investment advice” as their biggest challenge to increasing their allocation to impact investing. We hear this repeatedly from investors too.
Since a lot of what I do is work with advisors so they can bridge the gap between their knowledge of the space and client demand, here are my top three reasons why all financial advisors should know about impact investing.
1. Impact investing is real and growing. Many advisors have heard of the growth of investing that considers ESG (environmental, social and governance) factors, with US SIF Foundation’s 2018 Trends Report showing these assets now accounting for $12 trillion—or one in four dollars—of the total assets under professional management in the United States. That’s very encouraging, but arguably little of this is currently invested in critical solutions that people and the planet need, and what the U.N. Sustainable Development Goals call for. And therein lies the rub, or as I see it, the opportunity.
Impact investments are those where the investment is intended to create a positive and measurable impact as well as financial return—such as financing affordable housing, bringing water or electricity to developing communities, combatting ocean plastic waste and so on. For investors looking for deep impact, private markets currently offer the best options. These span risk/return profiles and asset classes from cash to fixed income to private equity to real assets.
The Global Impact Investing Network estimates that there is more than $502 billion invested in impact as of 2018, with surveyed investors expecting to increase and more investors getting involved in contributing to the growth. While this market is much smaller than the public equities allocations to ESG, options are increasing as fund managers develop track records and new products are created. The market will only continue to grow and diversify.
Financial advisors take note: investors who want to contribute to solutions and/or have an impact in certain sectors or communities, are often seeking the more direct experience and stories that impact investing offers. You can only expect this interest in genuine impact to grow. This leads me to my next tip…
2. Clients want impact investing options, so financial advisors need to catch up. It’s simple: clients care about impact so their advisors need to, as well. This is all the more true for the next generation of investors—millennials. According to the Morgan Stanley Institute for Sustainable Investing, 75% of individual investors, 84% of women, and 86% of millennials are interested in sustainable investing, along with 77% of institutions saying they have a responsibility to address sustainability issues through their investments.
And investors increasingly want (and even expect) their advisors to be informed about impact investing opportunities. According to the Rockefeller report referenced above, 73% of investors chose “depth of direct impact investment knowledge and experience” as the most important quality when selecting a financial advisor for impact investing. What’s more, they expect advisors to adapt to the mindset of the modern investor and understand their values. So advisors need to catch up to meet this demand.
3. Talking with clients about impact investing can pay huge dividends to your practice. Starting the impact conversation is easier than you think—and it can really help your practice. It’s not about asking clients if they are interested in impact investing. Rather, start with what your clients are passionate about and have that conversation. Investors interested in impact are usually driven by personal values – by their hearts and minds—not only by financial returns.
Investors typically approach impact from what I call an “issue and place” perspective: they look for investments related to issues that matter most to them, be it the environment, gender equity, social justice and/or issues related to the communities in which they live and care about, such as affordable housing or flood prevention. In fact, my conversations with advisors often start with “I have a client interested in X issue” or “most of my clients live in Y city or region, what’s there to do there?”