So, Four Investment Geeks Share a Rental Car…
For those unfamiliar with the term “impact investing,” it refers to investments intended to generate both measurable social or environmental impact along with financial return. Think of it simply as aligning an investor’s portfolio with his or her personal values and ideals. Impact investing was the subject of a recent industry conference focused on investable solutions (read products) for what many of us call “real assets”—land, green real estate, renewable energy, water, food, and agriculture.
When the conference ended, I found myself in an airport-bound rental car occupied by a foursome, each of us intent on catching flights to the next meeting. Each of us represented families and/or family foundations. Professional responsibilities ranged from chief investment officer to research director to a pair of senior client advisers. Each of us had attained varying levels of understanding and acceptance regarding impact investing. But we all had one common reason for being there—our clients. I’ve often feared that a surge in impact-related products by investment firms seeking to gather assets might cause investors to suffer a “false start” by placing capital in products that fail to generate desired results. This occurs because many impact investment strategies are too unconventional for “traditional” valuation models.
When asked about the current state of impact investing, I often highlight the early pioneers in private equity investing. At some point, every well-established private equity firm had to offer their “Fund #1.” At the time, the valuation models were foreign to many investment consultants and intermediaries. Today, private equity plays a key role in many institutional and high-net-worth investment portfolios.
The fact is, today’s investors can find sophisticated impact product offerings available across all asset classes. Efforts to standardize impact investing are also gaining momentum. The Global Impact Investing Network is a nonprofit organization dedicated to promoting and developing impact investment standards pertaining to transparency and accountability for performance. The group started in 2008 with a small group of 40 member organizations, and its global database of impact investment funds has attracted more than 650 subscribers and committed capital totaling $11 billion.
Impact investing has moved from the fringe to the mainstream of investment advisory services. Large multinational banks in Europe and the United States have launched dedicated impact investing efforts. A recent survey by Calvert Foundation concluded that 38 percent of investment advisers expressed “strong interest” (8 or higher on a scale of 1 to 10) in recommending “sustainable” investment strategies to their clients; 72 percent expressed “some interest” (6 or higher on a scale of 1 to 10) in the same survey.
My conversation in the rental car was not a scientific survey, but it reminded me that investors and clients ultimately are pushing professional advisers to move up the learning curve toward devising new and improved impact investment strategies. Advisers who recognize the opportunity are advancing the discipline. Family foundations also are exercising their rights to incorporate philanthropic pursuits and values within their portfolios, not just their charitable programs. They too are pushing for an alignment of interests and the necessary skill sets among their investment advisers.
The philosophy of “making as much as we can so we can give away more” is still a prevalent mindset for many, but increasingly the lines between “traditional” investors and “impact” investors are becoming blurred. As wealth managers, we debate and wrestle internally with the most effective way to incorporate the impact investment thesis into a process that has historically focused primarily on risk, return, and liquidity. Acknowledging the overlap between the two mindsets of impact and traditional investing is a good first step. What we’ve learned along the way is that both traditional and impact markets are changing so rapidly that any process used today will need to evolve as markets around the globe continue to converge.
Together, foundations, families, and their advisers hold the key to progress. As my conversation in the rental car highlighted, various wealth advisers will bring their own skills and beliefs to the mix, but all advisers must respond to the urgency of satisfying a visionary client. Instead of allowing your advisers to hide behind scarcity of information, force them to step up to the impact investing challenge. Why wait? We work for you. I suppose that’s the best punch line of all!
Craig Muska is director of investments, foundation services at Threshold Group.
