On Dec. 1, a company called ImpactAssets launched two products: the Microfinance Plus Note and the Global Sustainable Agriculture Note. These impact investing notes are “designed to target an interest rate range of 2.75% to 3%,” according to the nonprofit company, are held in brokerage accounts, have a liquidity feature and are available to end investors with a minimum investment of $25,000.
Just another product announcement? Definitely not. These vehicles are only two examples of the flowering of “impact investing” options for end investors, many of whom want their investment dollars to match their personal values while wanting simultaneously to see the value of their investments increase.
“Three-quarters of women and millennials want to invest with their values,” says Fran Seegull of ImpactAssets, which also runs The Giving Fund, a donor-advised fund with 700 clients who have invested an average of $150,000 into the DAF. These two debt offerings, Seegull says, allow ImpactAssets to lend to “regulated emerging market institutions that make micro loans,” in the case of the Microfinance Plus Note, while the Agriculture Note goes directly to support sustainable agriculture cooperatives and other groups identified by ImpactAsset that help small farmers around the world “stabilize their incomes and farm in a productive, sustainable manner.”
Ron Cordes, an ImpactAssets board member and executive co-chairman of Assetmark, said in the release announcing the notes that “our hope is that these notes help unleash the capital needed to effectively address global poverty through support of small growing businesses.”
That’s a very nice goal, you might say, but if you’re like many advisors, you also may be thinking these notes are a little too unorthodox for your investing models and for your clients. You would be wrong.
For one thing, Seegull says these investments are “not philanthropy” but rather “an alternative investment with an impact investing twist.” She also speaks bluntly to advisors who think impact investing and its corollaries — socially responsible investing (SRI), environmental, social and corporate governance (ESG) investing, and faith-based investing — are on the fringe. “The wirehouses are getting into” impact investing in a big way, she reports, while “clients are demanding impact products” and “advisors are losing assets” to the big Wall Street firms.
Joel Hempel, COO of Lockwood Advisors, which offers a range of impact investing options on its SMA platform, says the approach is attractive to “millennials, yes, but also to a broader swath of investors.”
Kim Wright-Violich, managing director and founder of Tideline, points out that impact investing was started by the Quakers, who had “investment policy statements in the 1700s.” Wright-Violich, formerly president of Schwab Charitable, the big donor-advised fund, says that advisors today can help form “stickier clients” and have “a chance with the next generation” of clients by offering impact investing options. “The financial services industry is ripe for disruption” through advisors’ use of impact investing, she says.
Regs, Ratings and Assets
The regulators are acknowledging the importance of values-based investing, as is Morningstar.
In late October, the Labor Department said it is replacing its guidance on socially responsible investing in retirement plans with new guidance that “all other factors being equal, it’s perfectly acceptable for ERISA plan fiduciaries to consider the social impact of their investments,” so long as those investments don’t compromise fiduciary obligations, according to Labor Secretary Tom Perez.
The guidelines replace language issued in 2008 by the Bush administration that “gave cooties to impact investing” and had a chilling effect on economically targeted investing, said Perez.
In September, the IRS announced that foundations’ mission-related investments should not automatically be subject to a tax. The agency said foundation investment managers were not required to select only investments that offer the highest return, lowest risks or greatest liquidity, though they must exercise the ordinary business care and prudence in making investment decisions that support, and do not jeopardize, the furtherance of the private foundation’s charitable purposes.
Wright-Violich said the IRS ruling will likely drive some amount of ESG investing at foundations, saying “those who were concerned about the regs will now have some comfort,” and that “people in this industry like to know where the lanes are.”
Audrey Choi, CEO of the Morgan Stanley Institute for Sustainable Investing, said in October that an analysis of the performance of more than 10,000 mutual funds over a seven-year period found that funds using sustainable strategies performed as well as or better than more traditional funds “more often than not.” Choi said a Morgan Stanley poll of investors showed that millennials are twice as likely as other cohorts to buy sustainable products like mutual funds, and twice as likely to divest of funds when they disagree with company policies.
Morningstar announced in August that by early 2016 it will add ESG scores to its mutual fund ratings through its different products, using company ratings from Sustainalytics. “We want to bring even greater transparency and accountability to the investment industry with ESG research, data and tools, while helping investors put their money to work in ways that are meaningful to them,” said Jon Hale, Morningstar’s director of manager research for North America.
Finally, the US SIF Foundation counted $6.57 trillion invested in some form of values-based investing at the beginning of 2014. Of that total, the Foundation counted $4.3 trillion in net assets in 925 investment funds — including mutual funds, VAs and ETFs, but not counting separate accounts or community investing institutions.
The Advisor Disconnect
Those are big numbers and potentially big moves, but still not convinced of the value of values investing? For advisors, the biggest numbers may be in what Joe Keefe points out is a “disconnect between demand and supply” when it comes to impact investing, or ESG investing as he prefers to call the strategy.
Do all the different names and strategies for values investing create confusion among investors and advisors (and those who write about it)? Keefe says, “There was some confusion about language, but that linguistic confusion is resolving itself.”
Wright-Violich of Tideline admits that the “industry is so nascent; the nomenclature is not standardized,” but the interest “across the client base,” and in particular “the next generation of advisors” and clients, hasn’t hurt the growth of values investing assets among institutions and individuals.
“It’s appealing to both liberals and conservatives,” she says.