How family offices and other wealth management groups view impact investing, and the development of this style of money management, were put under the microscope recently at a FWR conference in New York City.
Impact investing is the “next phase of capitalism”, members of a Family Wealth Report conference have been told.
The trend of seeking non-financial as well as monetary returns from investment is no passing fad or marketing ploy by firms trying to squeeze business from Millennials, but a firmly-established development that can ride out economic cycles, senior figures from the investment, family office and wealth structuring industries have argued.
“I want business that I invest in to serve the community, not the other way around,” Josh Mailman founder and managing director, Serious Change LP, told delegates attending the event, operating under the title of Family Wealth Report Impact Summit: From Values to Value Creation. The conference was held at the Grant Hyatt New York.
A noted exponent of Impact Investing over a multi-decade career, Mailman set out examples of his own investing successes – and failures – to illustrate how the business of investing with a purpose beyond financial gain was a viable one for the wealth management community. He has examples of his Social Venture Network, and his Serious Change enterprise (created in 2007), and its support for Andy Kuper, the founder of Leapfrog Ventures, that indirectly lead to the now $1 billion of global micro insurance investments they have made or will make. Other areas of concern include work in renewable energy, which has become a broad example of impact investing, he said.
Impact investing, along with any other type of investing, carries risks, he cautioned: “Not all impact investments are going to have a happy ending.”
Mailman noted the trend among family offices and other large, ultra-high worth entities in putting money directly to work, as well as via funds. In certain cases, such as in the venture capital space, there is a need to think about diversification and risk management. “There’s no safety in numbers in doing venture capital but I would prefer to be with others when the cash calls come,” he continued.
Diversification is not just about spreading money around companies and sectors; the notion also applies to diversity in terms of gender and race.
Mailman summed up by urging would-be impact investors to focus on subjects they really cared about rather than to spread their enthusiasms too widely.
The first panel, under the theme of Inter-Generational Conversation: Combining Returns with Purpose, featured the following speakers: Susan Winer, Co-founder and Chief Operating Officer of Strategic Philanthropy; Julie Shafer, head of Strategic Philanthropy & Purpose Investing, Family Wealth Advisors Bank of the West, BNP Paribas Group; Randy Kaufman, senior vice president, EMM, and Ben Bingham, founder and CEO, 3Sisters Sustainable Management.
Winer, who chaired the panel, said an aim was to “demystify” impact investing. Shafer argued that she was “convinced that money can be made with impact investment”. Kaufman said it was a problem that so many people still believed, wrongly in her view, that impact investing must lag the returns of conventional investment. With wealthy families, she said, the values of children will not necessarily be the same as those of their parents. It made sense for such families to let younger members put money into impact investing and therefore, among other consequences, to learn from mistakes as well as the successes.
Bingham said “impact Investing is like other styles in that there may be good managers and not so good ones”, but that “the tendency of impact managers is to pay closer attention to what matters”. Riskier impact deals “can provide spice to the portfolio”, he said. “The journey from sustainable agriculture to managing money,” he said, citing an example close to his own experience, “isn’t a long journey”.
Impact investing can also provide useful diversification, or “seasoning” to a portfolio, Bingham said. He also spoke of how impact investing might be explained by his generation’s desire to re-connect with important values. “We were supposed to be the `peace and love’ generation but instead became the `Gordon Gekko’ generation. We want to turn that around.”
Asked by Winer if there was more talk than action around impact investing, Kaufman said that the position has definitely changed from where it was before. “10 years ago nobody had heard the term. There’s a lot of action,” she said, but said advisors need to be more educated about impact investing than they are at the moment.
The second panel, taking the theme of Preparing for Impact: The Role of Advisors in Ensuring that Impact Really Delivers, featured the following speakers: Ned Dane, senior Vice President, Head of Private Client Group, Oppenheimer Funds; Adina Schwartz, Director of Client Engagement, 21/64; Casey C Clark, Director of Sustainable & Impact Investing, Managing Director, Glenmede, and Betsy Erickson, Senior Director, Arabella Advisors.
UHNW millennials want to imprint their values and passions into their investment portfolios, Dane said. The availability of real-time news, and a heightened focus on human rights, education issues, and the environment, to name just some forces, had created a rich soil for impact investing to take root. “They [investors] want to find a way to align portfolios and wealth along with these dimensions,” he continued.
The younger generation isn’t an optimistic one, Dane said, explaining how it has come of age through the 9/11 terrorist attacks, the 2008 financial crisis and the subsequent political and cultural fallout. “They want to be more conservative and preserve wealth rather than create it,” he said.
Schwartz sought to put impact investing into the conversation about inter-generational wealth transfer, and about how this style of money management is seen as a way to engage the upcoming population cohort in the business of investing. “This isn’t just about passing the baton anymore,” she said.
Clark said the rise of impact investing isn’t just a “Millennial thing”. “We are seeing more folks coming to us and saying that `I’ve read that impact investments can be made without sacrificing returns… Can we discuss your approach?’” “There are a lot more people talking about this compared to five years ago,” Clark continued. When asking people in the UHNW segment if they, or a member of their family, are interested in learning more about impact investing, around 40 per cent say yes. One of the most effective ways to transition a portfolio from a traditional to an impact-aligned portfolio is to take a step-by-step approach, moving in a slow, methodical manner. “For example, investors can transition 5-10 per cent of the portfolio over each of the next three years. All the while, comparing the performance versus traditional strategies and gaining comfort in the overall approach,” Clark said.
Dane gave an example of how bringing up issues around values and non-financial matters can be used to help family members who are clients to improve their relationships. He concluded by stating that at present, many advisors wrongly think of impact investing as a trade-off.
Erickson argued that there are definite signs of a rise in client interest in impact investing.
Discussing the title of Measuring Impact: The Challenges of Translating Principles into Investment Practice, the third panel in the conference, were Chris Fowle of PRI; Anisa Dougherty, Impact Analyst, Threshold Group; Christina Alfonso-Ercan, CEO, Madeira Global, and Richard Zimmerman, Advisor, WE Family Offices.
Fowle pointed to the different ways that people think of “responsible investing”, such as those based on screening out investments deemed unacceptable to more positive approaches that seek out desired opportunities. “We are solidly of the view that this is for the mainstream investor.”
Dougherty, talking about some of the methodologies in the space, said understanding of impact investing financial performance continued to evolve as the investable universe expands and noted the different levels of data availability for public market versus private market investments. On the public side, Dougherty noted: “There is evidence that ESG can be both additive to corporate financial performance and a signal of future risk.”
Alfonso-Ercan highlighted a USSIF finding that roughly $6.2 trillion of US-based assets now incorporate ESG approaches. “Non-financial data has historically been undervalued in investment decision-making." She said that adequately measuring non-financial (impact) performance and incorporating it as context for financial decision-making may be a valuable tool for both client and employee retention over time.
Asked by your correspondent about whether an influx of institutional money into the impact investing/ESG space might dilute some of the focus on non-financial outcomes, panelists said that “mission drift” would be an issue going forward, and had to be watched closely.