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Impact investing is a fairly new movement in the investment world, the term itself coined only in 2007. It represents the next phase in the socially responsible investing (SRI) trend that started in the 1950s when faith-based organizations began screening their equity investments to avoid businesses whose practices did not coincide with their values and beliefs.1 Eventually this movement led to a meeting of field leaders, hosted by the Rockefeller Foundation. The hot topic of discussion at this 2007 meeting was the next stage in the SRI journey, which involved investing in companies that not only had environmental, social and governance (ESG) best practices and corporate social responsibility (CSR), but also strived to improve local or international communities.1 Thus, the term “impact investing” was born.
The majority of individual impact investors are among the wealthy. With inheritance money and concerns about the kind of legacy one wishes to leave behind, high-net-worth investors are transitioning all of their investments in every asset class into impact investments. This is the latest stage of impact investing, called “100% impact investing strategies” or “total portfolio management.”1 First-generation family members whose parents were immigrants (and can remember a time when money was not always easy to come by) are using this opportunity to remind the later generations about the importance of each dollar and reconnect them to family values. However, it is the younger wealthy individuals all over the world who are the most zealous about turning toward one hundred percent impact investments. Noticing the growing challenges of poverty, population growth and climate change (to name a few examples), this generation fosters passion over these concerns and are willing to make every dollar count by investing in companies with a beneficial focus, such as renewable energy options.
Despite the growing popularity among the high-net-worth individuals, SRI and impact investing have met their fair share of hurdles. Assuaging concerns about trade-offs between impact return and financial return has been a major one. However, this trade-off does not even exist. Studies have shown that companies who have a product or focus in helping the environment or society do not suffer from lower financial returns. In fact, during the 2008 recession, the sustainability-focused companies fared the best: they outperformed the others in their industry and suffered the least. This performance is thought to be due to the fact that these companies stress long-term health and return over short-term gains, focus on ESG and implement a risk management system, which are all practices that most investors tend to reward.1
The potential problem with impact investments is that while there are measures for qualitative and quantitative impact outcome, most impact funds are held in private markets which are not required to disclose their best performance data.1 Since this nondisclosed data is the information used to determine their strategical decisions, firms are not going to publish it unless it becomes a requirement.
On the other hand, there are many investment options for the impact investor. According to a Global Impact Investing Network (GIIN) study, impact funds have grown exponentially over recent years; since 2009, more than five times of the total number of funds available before 2006 have been launched.2 The vast majority of funds utilize tools to measure their social and environmental performance in addition to their financial return, with target returns ranging from below-market to market-rate.2 When first investing in impact firms or projects, many people would not think of municipal bonds, but they are a common starting point because they help build infrastructure and schools.1 Investors also begin by swapping out a fund or two that have the poorest impact out of their entire portfolio. Over time, if the investor so chooses, the rest of the investments will follow suit until the portfolio is one hundred percent impact invested.
Currently, most funds are acquired through investors’ advisors, which raised questions about conflict of interest in regards to advisors’ fiduciary duties. However, it has been argued that fiduciaries must concern themselves with more than just their clients’ monetary best interests. Jed Emerson, who is chief impact strategist at a nonprofit financial services firm called ImpactAssets, asserts:
Being a good fiduciary is about more than making money. 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. 1
Returning to the recent financial downturn situation, advisors who ignored impact investment options may have cost their clients more money than if they had originally considered the “off-balance-sheet” risks that Emerson mentions.
While socially responsible investing has been in place for over half a century, impact investing is still a fairly new trend about which many people have yet to hear or learn. This may be the reason why the majority of individual impact investors are among the wealthy. Regardless, if the popularity of this type of investment continues to increase and attract more investors, the pressure will be placed on firms to compete through impact measurements as well as financial returns—at which point, everyone benefits.
References:1. Boulton, Leila. "The 100% Club." Private Wealth. Charter Financial Publishing Network Inc., 10 Mar. 2015. Web. 19 Mar. 2015. <http://www.fa-mag.com/news/the-100--club-21030.html>. 2. Fischer, Michael S. "Surge In New Impact Investing Funds, Study Says." Private Wealth. Charter Financial Publishing Network Inc., 6 Mar. 2015. Web. 19 Mar. 2015. <http://www.fa-mag.com/news/surge-in-new-impact-investing-funds--study-says-21020.html>.