Close Close

Financial Planning > Charitable Giving > SRI Impact Investing

5 Reasons Advisors Need to Rethink Impact Investing

Your article was successfully shared with the contacts you provided.

Facets of portfolio management often parallel sports—and scuba diving is a good example. Both involve taking calculated risks, demand passion and commitment, and require taking personal responsibility for a successful outcome. Doing both of them well also requires a set of tools and, even more important, knowing how to use them. 

Divers depend on an oxygen regulator and a gauge to measure the water’s depth and tell them how long they can stay submerged. They must stay calm when diving in deep water, rather than resurface too quickly—their lives can depend on it. 

Like divers, the best portfolio managers are passionate about their craft, demonstrate commitment, use the right tools to build a portfolio and take responsibility for a successful outcome. They also remain calm when markets are roiling, rather than head for the sidelines in the midst of turbulence. 

I am a diver and a portfolio manager, and in my years of doing both, have come to realize how the sports analogy also extends to my particular specialty, impact investing—the intentional practice of aligning investments with personal values to seek both a social and financial return. I employ specific tools, such as risk measurement, to guard against market drawdowns, and use research to assess an asset manager’s track record to gauge the potential for long-term performance before including the portfolio in my asset mix.

And just as the best portfolio managers develop a personal perspective that informs their investment decision-making process, I bring my own values and sensibilities as both a woman and a Millennial to mine. 

Impact investing is one of the fastest-growing segments of the investable marketplace. Sustainable, responsible and impact investing increased by 76% from $3.74 trillion in invested assets to $6.57 trillion in invested assets between 2012 and 2014, according to the Forum for Sustainable and Responsible Investment. And ESG investing, which measures the environmental, social, and governance issues that can have an impact on a company’s success, is particularly important to women and Millennials—the latter being that special group that eschews their parents’ more traditional investment managers in favor of smartphone apps that connect them with digital advice providers.

As the largest generation working today, according to a study published by Facebook in January 2016, Millennials have redefined success along the lines of paying down debt and saving and investing for the future, often foregoing buying a home and the fancy stuff to furnish it. They care about the world—its environment, its people and its diversity.

I know I do, and I’m not alone. In fact, a Morgan Stanley study notes that 82% of high-net-worth Millennials express interest in socially responsible, sustainable and impact investing, compared with only 45% of the high-net-worth investor base overall.

Millennials also want a financial advisor who shares those values, or at least understands why they are important to them.

Yet a survey of advisors showed that the majority have little to no interest in sustainable investing. They may be missing an opportunity to reach a massive pool of potential investment assets: Millennials alone stand to benefit from a $30 trillion wealth transfer in the next few years. Advisors who offer ESG investments can align portfolios with their clients’ values, offer a diverse set of solutions, generate competitive returns, and even reduce portfolio volatility. They also can broaden the more traditional analytical process by shining a spotlight on ESG investment criteria that seldom appear in a company’s financial statements.

But not all ESG portfolio managers are equal.

Those of us who have a personal connection to the space bring an added edge—credibility, or walking the walk, as it were. Just like successful technology portfolio managers oftentimes have a ‘geek’ propensity, some of the best ESG managers come from the ranks of women and millennials. It’s in our DNA to care about society and solving the world’s challenges, so building portfolios that screen “sin” stocks and embrace those of companies committed to the greater good are logical ways we can take a positive stance on issues of great concern to us.  We bring a steely insight to how our contemporaries think and invest, and we understand their concerns and challenges.  It’s a vital skillset that I rely on to manage impact portfolios that resonate with them.

ESG portfolio managers also can make a difference at the corporate level. Don’t forget that we often vote proxy on behalf of shareholders, so we can bring pressure on companies to make positive changes. We also can help to form public policy by serving on committees that advise companies and institutions on ESG issues. And it’s an added plus when we are privileged to work for investment firms that demonstrate passion for and commitment to the space, and whose industry peers recognize their success in doing so.

ESG portfolios come in an array of solutions that serve a range of clients, from small accounts (with low minimums) to individual portfolios for high-net-worth clients, large pension funds, and endowments.  Solutions can comprise exchange-traded funds (ETFs), separately managed accounts (SMAs) and mutual funds.

My passion for diving informs my work and approach to managing impact portfolios. I channel the same personal dedication and reliance on essential tools and expertise to managing impact investments as I do to diving.  I am passionate about effecting positive societal outcomes and committed to empowering investors to build a more positive and resource-efficient society through their investments. 

My headline promised you five reasons that advisors should rethink their approach to impact investing. They are:

1.  An opportunity to build deeper, more meaningful advisor-client relationships by understanding and incorporating social passions and priorities into their investment portfolios.

2.  Solutions exist to meet a variety of client sizes.

3.  Investors can align investments with social goals.

4.  Impact investments can make a difference at the corporate level.

5.  Impact investing offers competitive returns, transparency, and the potential for lower portfolio volatility.

The information, analysis, and opinions expressed herein are for informational purposes only. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.