The Growing Influence of Impact Investing

In its 10th annual “U.S. Sustainable, Responsible and Impact Investing Trends” report, the US SIF Foundation addresses the possible confusion head on. “While the variety of labels can sometimes be confusing, the core message is clear. A growing number of investors, institutions and financial professionals are deploying and managing capital to build a more sustainable and equitable economy,” the foundation wrote in its report.

Whatever you call it, advisors are behind the curve in offering values investing to clients, Keefe says, which he believes is an efficient but underused way for advisors to “attract and retain clients.” Keefe, president and CEO of Pax World Investments, cites two survey findings that show how advisors are not on the same page as their clients when it comes to investing with their values (see charts, below).

What Is Impact Investing?

“Running screens” on potential investments is “not the same as impact investing,” says Wright-Violich; rather impact investing asks “how do you drive a positive impact” on social, environmental and other values with your investments. Her colleague, Tideline Director Monique Aiken, says “socially responsible investing assuages your guilt — you didn’t do anything bad with your money — while impact investing is about intentionality.”

In other words, it’s not what you screen out, like weapons, tobacco or pornography; impact investing seeks to include companies acting in a way that supports values and causes that the manager (or investor) wants to encourage, which can be a wide universe that encompasses the interests of a broad spectrum of social, environmental and religious values. ImpactAssets’ Notes are a good example of impact investing in that light. Or as Keefe puts it, “now we define ourselves by what we do invest in” rather than what we won’t.

Keefe recalls that when Pax World launched the first SRI fund with $101,000 in 1971 (now called the Pax World Balanced Fund, with $1.8 billion in assets as of Sept. 30, 2015), it was controversial among money managers.

“When we started the fund in 1971, we screened out” companies, Keefe says, and were “met with skepticism: ‘Why shrink the opportunity set for a non-financial reason?’”

At Tideline, Wright-Violich says, “we hope to add to the professionalism of the space” by offering practical consulting help to asset management firms, broker-dealers and individual advisors who want to build their own impact investing offerings for end clients. To succeed in the impact investing space, already “the big firms know they need more than one product” on their platforms. There’s a need for that consulting help especially for advisors, she says, who traditionally “have underplayed their philanthropic services” but need to figure out how to get paid for those services. “You can’t do this for free,” Wright-Violich says. “You have to build scale.”

Companies that provide outsourced investment management for advisors are aware of the need and are providing solutions. Joel Hempel has been with Lockwood Advisors, the SMA arm of Pershing, since 1996, and says his goal has always been to give advisors the products and support to better compete. That’s one reason why Lockwood has “five ESG managers” on its platform, to help advisors deliver “holistic wealth management” by focusing on tax-aware investing but also to meet clients’ values investing needs.

Envestnet began its Impact Investing Solutions (IIS) program in 2008 through a partnership with Veris Wealth Partners and has seen consistent, high growth in its assets in IIS. One of the many SMA strategies available on its platform is Dana Investment Advisors’ Socially Responsible Equity strategy, managed by Duane Roberts. That SMA strategy won the inaugural Impact Award as part of Investment Advisor and Envestnet’s 10th annual SMA Managers of the Year program. At the time, we lauded Roberts and his team for running a strategy that “debunks the myth that impact managers may sacrifice return for investing in a good cause. Their strategy incorporates best of class environmental, social and governance impact criteria, and has a 15-year track record of consistent, superior investment performance.”

Keefe of Pax World says that interest in impact investing and the growth of assets “from all channels” has developed more quickly over the past 18 months than over the past 18 years.

The Driving Factors

Two big factors are driving that growth in interest and real assets, Keefe says: data and demographics.

Increasingly, good research has shown that ESG “has materiality” in investing, and “the old canard that you had to sacrifice returns” for values investing is no longer heard. “ESG delivers alpha and manages risk,” he says, and fits into a broader investing trend: “The world was already headed toward factor investing.”

The research includes data that more diversity in a company’s leadership provides better returns. That prompted the launch of the Pax Global Women’s Leadership Index, which identifies companies around the world that “demonstrate a commitment to advancing women through gender diversity on their boards, in executive management and through other policies and programs.” Those companies have to meet ESG standards as well.

Keefe’s point is that the data on ESG or gender equality shows “there’s a business reason to do this” type of investing. Yes, Pax World, which gets 96% of its assets from advisors, also “looks at traditional metrics, like P/E ratios” in building its funds and separate accounts, but adds other metrics, such as a company’s emissions footprint and the diversity of its workforce.

Since the financial crisis, Keefe says “risk is a bigger part of the conversation than returns” for clients and advisors. That’s “another selling point for ESG; we’re focused on risk, on downside capture” since “ESG is another portal into a company’s risk profile.” The data also suggest that just as more diverse boards produce better returns at companies, “at some point, you have to look at non-diverse boards as a risk factor” since they “might have a higher cost of capital.” In the end, the ESG data shows that it’s “all about materiality,” Keefe says, and that sometimes “the right thing to do is also the smart thing to do.”

As for demographics, “women and millennials are more interested” in values investing, and institutions have long been more invested in values investing than individuals. One example of the changing proclivity is a survey from Spectrem Research released in May 2015 that found more than one-quarter of investors under the age of 45 allocate at least 25% of their investable assets to socially responsible companies. Twenty-one percent of female investors do the same, the Spectrem research found.

As for older investors, Keefe recalls that “people our age were taught that you make money here and then spend it there” to fund institutions that matched the client’s values through philanthropy, for instance. But younger investors, he suggests, want to achieve both social good and good returns at the same time.

As values investing has grown in assets and industry acceptance, there’s been another big change, Keefe says, as shown in the leadership of the Forum for Socially Responsible Investing. Keefe, who served on the board of the Forum back when it was called the Social Investment Forum (the name change took place in 2011), says, “It used to be that there was a strong inside baseball approach to values investing conversations at SIF. We were just talking to each other.”

Now, in addition to traditional values-based asset management firms and foundations, there are members from institutional investors like New Amsterdam Capital Management, the founder of Breckinridge Capital Advisors, the COO of the Morgan Stanley Global Sustainable Finance group and the global head of sustainable business and finance for Bloomberg. The Forum’s institutional membership roll includes three of the four wirehouses.

— Read “Pension Advisors, Be Careful With ESG Investing” on ThinkAdvisor.