The growing popularity of impact investing presents many challenges to financial advisors, among them how to measure the results of those investments, which is not as simple as it sounds.
There is, of course, the monetary gain or loss for the investor, as well as the impact of the investment on the particular issue or population it’s targeting. But in addition there’s the “social return” for the investor, the so-called “warm glow effect,” that the investor feels after making such investments.
“People make impact investments for different reasons,” says Jeff Finkelman, research associate for impact investing at Athena Capital Advisors, an RIA with $6 billion in assets under management.
“It’s not just seeing the outcome they have on those that are affected by the investment but … insuring that the capital had the kind of impact the client was looking to generate.”
In other words, did the client feel good about doing good? The return is no longer defined in financial terms alone for the investor or its impact on the investment beneficiary.
Finkelman recommends that before investing a client’s money with a social purpose in mind, a wealth manager consult with his her client to understand why the investment is being made and identify the metrics to use to measure its success or failure.
For example, will an investment in a community development bank be measured based on the number of loans that it issues or the demographics of its borrower base such as income or race or another variable. “ “You want to identify those up front,” says Finkelman.
Wealth managers working with mutual funds or private equity funds on impact investments can collect that data from those managers. “There’s more of an onus on the impact manager … to provide data and results,” says David Lynch, president of Athena Capital Advisors, which caters to high-net-worth individuals and families as well as endowments and foundations.
“If it’s a mutual fund they want to keep your money; if it’s a private equity-style fund they‘re going to want to raise [capital for] a second and a third fund.”
Fund managers may get some support for that – or discouragement – when Morningstar releases its environmental, social and governance ratings on funds sometime in the coming weeks.