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How to Meet Client Demand for Impact Investing

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In 1970, economist Milton Friedman published his seminal magazine article, “The Social Responsibility of Business Is to Increase Its Profits.” Since then, the line between portfolio management and philanthropy, profit and purpose, has blurred.

Profits may still be a key measure of a company’s value to consumers and society, but perspectives on corporate social responsibility have evolved. There’s a growing sense that maximizing shareholder returns over the long term goes hand in hand with an expanded sense of social purpose and responsibility. Investors are among those who are driving this conversation and generating interest in impact investing — or investing for financial returns and social and environmental benefit.

This shift is reflected in the current investment landscape. There are more than 1,000 funds that investors can choose from, ranging from broadly focused ESG (environmental, social and governance) funds to those that focus on themes such as microfinance, diversity or gender equality in the workplace. And there are surely more to come.

About $8.72 trillion of assets in the U.S. are invested with impact-oriented strategies, up 135% since 2012. And it’s estimated that $1 out of every $5 of assets under professional management in the U.S. is in sustainable and impact investments.[1]

The interest in impact investing should pick up as impact becomes a more commonly accepted objective among mainstream investors. Changing demographics are also at work: More and more women and millennials — two groups that consistently show high levels of interest in impact investing—will be deciding how the ongoing multitrillion-dollar intergenerational transfer of wealth in the U.S. is managed and invested.

Advisors have an important role to play in initiating conversations about impact investing with clients and translating a preference for impact into practical portfolio strategies.

Where to start? If you’re familiar with your client’s charitable interests and those interests lend themselves to impact investing (e.g. climate change), then offer to explore ways to make sure those values are reflected in their investment portfolio. Alternatively, you can begin to uncover a client’s values by asking if there are any sectors or companies they would prefer not to own.

Investors who are familiar with impact investing may be interested in restructuring their investments in a way that more actively reflects their values and philanthropic goals. That may mean exploring and recasting some of what they own or give.

Before deciding how to incorporate impact investing into their portfolio, investors need to decide how far they’re willing to go. Some wealthy investors want to build or structure a portfolio that’s highly impact-focused, but more often they welcome starting with a simple commitment to allocate a portion of assets to a fund that considers ESG criteria.

An impact strategy can encompass philanthropic grants and a mix of investments offering both “concessionary” and strong financial returns. Donor-advised funds (DAFs) can be used to combine impact investing with charitable giving and tax planning, allowing contributors to lock in tax benefits by deducting the full value of assets transferred. Investments within the DAF grow tax-free, and clients don’t have to decide right away how to make grants from within the account.

Beyond explaining investment options, advisors can also serve as guides to resources and help clients think about how impact investments can work within a philanthropic context. Organizations such as Toniic and the Global Impact Investing Network (GIIN) are two go-to learning resources. And scanning US SIF’s Comprehensive List of Funds and Morningstar’s Sustainability Ratings is a good way to become familiar with the evolving investment landscape.

Finally, monitoring performance and achieving desired rates of return at appropriate levels of risk are no less important in managing impact assets than they are with traditional portfolios. Advisors need to help clients review and assess the performance of impact investment choices.

If the mission of impact investing is to realize financial returns and make the world a better place, the methods are not always so clear. But that’s an opportunity for advisors who can navigate and interpret the evolving landscape on behalf of clients.

[1] Citations provided in Fidelity Impact Investing Practice Management Module, p. 7: US SIF Foundation, 2016

Sarah Gelfand, director of donor programs at Fidelity Charitable, is focused on the critical intersection between impact investing and philanthropy. Sarah works directly with donors and advisors to incorporate impact investing into their philanthropic investment and granting plans. Sarah has a background in nonprofit management and impact investing, most recently at Duke University. She was a founding director of the Global Impact Investing Network. She also previously worked in product development, business development and strategic planning with several technology companies. She has conducted public health research in malaria, HIV/AIDS, and cancer, among other areas. Sarah holds a B.A. in applied mathematics from Brown University and an M.S. in statistics from the University of Washington.


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