As investors increasingly rally behind the concept that their investment choices yield the ability to positively impact social or environmental issues, interest in impact investing has skyrocketed. Of the more than 22,000 investors worldwide surveyed by the Schroders Global Investor Study 2017, 78% claimed that they place more emphasis on sustainability than they did five years prior. Commensurately, 64% indicated that they had increased their allocations to sustainable funds over the last five years — and nowhere was this shift more pronounced that in the U.S.
A wealth of data further corroborates a collective shift in how we as a nation view our investment decisions. According to the Securities Industry and Financial Markets Association, the market size of sustainable, responsible and impact (SRI) investing in the United States was $8.72 trillion as of 2016 — double what it was just four years previously. And it’s clear that this isn’t a passing fad or short-term trend: in the almost two decades from 1995 to 2016, assets held in responsibly managed asset pools grew from $639 billion. That’s an increase of 1,265%!
In short: The impact investment revolution is upon us — and it’s just beginning.
Leading this charge is the millennial generation, whose penchant for social causes that serve the greater good has been widely documented. According to Morgan Stanley’s Institute for Sustainable Investing, this cohort is twice as likely as the overall population to invest in sustainable assets — and early predictions indicate that the ensuing Gen Z-ers will share their affinity for impact.
With the next generation of investors set to inherit a total of $59 trillion in assets between now and 2060, this is a critical time for advisors to consider how best to position their impact offering. By crafting a message that resonates with their audience, and explaining clearly how impact investing strategies can be incorporated as part of a well-managed portfolio, financial services professionals can deepen client relationships and capture new assets.
Advisors, then, are understandably keen to meet their clients’ growing interest in this rapidly expanding space. The problem? While they might have a high-level understanding of core concepts, many are unwittingly falling short by utilizing key terminology interchangeably. To communicate effectively with clients and gain their trust — which will ultimately attract more assets — it’s important to understand the differences.
Let’s start by taking a closer look at two terms we hear frequently — ESG and impact investing — and how they differ:
Environmental, Social and Governance (ESG)