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Impact Investing Sees Continued Growth
By Betsy Moszeter and Karim Harji

A year ago, First Affirmative released the results of an industry survey on the rapid rise of “impact investing.” During the first ten months of this year, evidence has continued to build in support of the survey’s findings that “2013 will be the year of impact investing.”

An important note on terminology: The term "impact investing" encompasses a range of approaches that allow organizations and individual investors to get involved in addressing specific social and environmental issues while also generating a financial return. In some cases, investment opportunities are designed to achieve competitive market returns; in other cases, there is greater emphasis on achieving social impact. Unfortunately, not everyone uses the terminology consistently, so it is often very confusing for investors.

Impact investing continues to gain interest and traction internationally, was elevated as a key issue area at the G8 meetings in June 2013. Also, the World Economic Forum (WEF) recently issued a report titled “From the Margins to the Mainstream: Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors.”

What do these trends suggest for advisors? The Gateways to Impact survey of over 1000 financial advisors found strong interest in sustainable investing among advisors, with a near-term market potential of $650 billion in the U.S. The results of this survey are important for several reasons:

  • It showed that activity is already taking place: Over half of the sample indicated that they have clients currently engaged in sustainable investing.
  • It suggested that there is increased demand: The advisors who responded would recommend sustainable investments to roughly one-third of their clients.
  • It clarified the differentiation opportunity: More than two-thirds (69%) of advisors saw sustainable investments as an opportunity to grow their practice.

There are still significant gaps, however, in how sustainable, responsible, impact investing is understood and practiced. The WEF report provided more clarity around the definition of impact investing, and made three important distinctions:

  • That impact investing it is an investment approach and not an asset class;
  • That the intentionality to create impact matters (that is, impact cannot be an unintended consequence); and
  • That the social and environmental outcomes (as well as financial returns) are actively measured.

In the Gateways to Impact survey, advisors provided additional insights. Data on social and environmental impact is highlighted as a key need to drive growth, with particular interest in independent third-party ratings as well as audited social and environmental performance data. While the industry has made some progress on these fronts—for example, the increasing adoption of Impact Reporting and Investment Standards (IRIS) and Global Impact Investing Rating System (GIIRS), and the creation of the Sustainability Accounting Standards Board (SASB)—there is still more to be done.

What does this mean for advisors who are interested in driving the industry toward investing in a more sustainable, responsible and positively impactful manner?

First, educate yourself. There are, for example, many studies that ‘bust the myth’ of underperformance, and support the reality that sustainable, responsible, impact investment strategies provide competitive returns over the long term. Here is a small sample of the many studies available:

  • Demystifying Responsible Investment Performance

http://www.unepfi.org/fileadmin/documents/Demystifying_Responsible_Investment_Performance_01.pdf

  • Shedding Light on Responsible Investment: Approaches, Returns and Impact

http://www.law.harvard.edu/programs/lwp/pensions/conferences/cm_europe12_09/Shedding_light_on_responsible_investment_free_version.pdf

  • Moskowitz prize-winning studies showing that Corporate Social Responsibility (CSR) and profitability are linked

http://responsiblebusiness.haas.berkeley.edu/programs/moskowitzresearchprogram.html

  • Ten Things to Know about Responsible Investment and Performance.  A white paper by Kimberly Gladman, PhD, CFA

http://www.businessinsider.com/ten-things-you-absolutely-need-to-know-about-responsible-investment-and-performance-2011-3

Second, engage your clients to understand the issues they care about, and thematic topics about which they are interested. Start the conversation around what matters to them, and listen what they are excited by. Then, use the many resources available to provide them with investment solutions aligned with their concerns and interests.

And finally, recognize that this conversation is occurring across client types, and investment advisory/management firms around the world, and that you can and should participate in it. We will continue to expand on opportunities to learn more, and participate in the conversation in future posts and publications.

About the Authors:

Karim Harji is a co-founder and partner at Purpose Capital. Betsy Markus is Vice President of Business Development for First Affirmative Financial Network. Both work with investors, advisors, foundations, and financial institutions on aligning their investment strategies with their social impact objectives.

Posted: November 11, 2013