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Financial Planning > Charitable Giving > SRI Impact Investing

How to Discuss Impact Investing With Your Clients

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The demand for impact investing has spread from institutional investors to retail investors, leaving financial advisors little choice but to include such investments if their clients want them, and more of them do.

“It’s hard to know the amount of global [impact] assets. But three-quarters of millennials and three-quarters of women agree with the UN Principles for Responsible Investment,” said Zachary Karabell, Envestnet’s head of global markets who led a panel at the firm’s advisor summit in Grapevine, Texas. That’s two to three times the number of baby boomers, said Karabell.

(Related on ThinkAdvisor: ESG Investing: No Longer Optional, but Essential)

Nicole Davis, partner at Veris Wealth Partners, described the growing demand from millennials and women this way: “I make choices where my food comes from. Why do I own companies whose products I would not buy?”

But impact investing goes beyond excluding certain stocks or bonds from a portfolio, according to the panel discussion entitled “State of the Market and Opportunities for Impact.” It also includes assets in portfolios that align with what an investor believes in, a “conscious consumer mindset,” said Ali Caffery portfolio manager, Envestnet |PMC.

“There’s an explosion of product” in the impact space, “and many will end up on the Envestnet site,” said Davis.

Davis said among impact investment issues, climate change, other environmental issues and gender issues are attracting the most interest from retail investors.

These types of impact investments are also the easiest to implement in the public market, said Davis, who added that there is also growing interest community wealth building to mitigate the consequences of growing income and wealth gap and in sustainable agriculture.

Investments in ways to slow climate change and boost gender diversity also have the most potential among impact offerings, said Caffery.

“Incorporating women in leadership diversity and on boards in leadership positions allow companies to outperform,” said Caffery. (Studies by Catalyst, Credit Suisse and McKinsey found that public companies with one or more women on their boards tend to perform better.) Other companies can benefit from the move away from fossil fuels, explained Caffery.

Starting the Discussion

The key for advisors is to find out what impact issues are of concern and interest to their clients. Davis suggested that advisors ask clients about their volunteer activities and charitable donations.

And if a client is definitive about excluding fossil fuel stocks, for example, help them “to moderate what they really want and what is available to them. Give them an understanding about what it means to exclude all fossil fuel companies,” said Davis.

Once it’s decided where a client wants to invest in terms of impact investing, advisors need to study how asset managers incorporate impact or ESG into their strategies, the data resources they use and whether they have dedicated resources for that purpose, said Caffery. Are they screening out companies that might not align with investors’ goals? Or are they proactive, voting proxies, investing in green bonds and/or affordable housing?

Another important element is portfolio construction, said Diederick Timmer, executive vice president at Sustainalytics, in a data firm that specializes in ESG and corporate governance research and ratings.

If the objective is to develop a well-diversifed portfolio, then the advisor can select those companies in a particular industry performing best on an ESG basis, said Timmer. But if the choice is to be less diversified (excluding some industries) the advisor can look for companies with high-impact products.

“Look at the portfolios, the intent of the manager,” said Timmer.

These and other exercises represent “an incredible opportunity” for the advisory market “to change the model … beyond the investment questionnaire,” said Darby Hobbs, president of Social3, a consulting firm that specializes in ESG, impact investing and corporate social responsibility (CSR). “Start over with new template to develop a dialogue with individual clients.”

And keep in mind that only humans, not robos, are capable of having a  conversation about these investments, said Karabell.

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