Today’s individual investor wants more than just attractive returns. They want to know how their investments can make a difference. They want to maximize rates of return while ensuring the investment will make a positive impact on the world. It’s what we call the impact investment revolution, and it’s just beginning.
Investment advisors who are building their businesses have an opportunity to deepen relationships and capture new assets if they craft the right message, and explain how impact investing can be a natural fit for a well-managed portfolio. Many advisors are using technology platforms to improve efficiency and reduce cost for clients, but impact investing is also an area where technology and data can enable investment advisors to source opportunities that tell a compelling story as well as delivering best-in-class returns.
And it’s not just new clients. The next generation of investors will inherit a total of $59 trillion in assets between now and 2060, the largest wealth transfer opportunity in history, according to the Center on Wealth and Philanthropy at Boston College. That means your existing clients will be passing their assets to a generation of individuals who may think a little differently about investing than their heirs.
The market size of sustainable, responsible and impact investing in the United States was $8.72 trillion as of 2016, or one out of every five professionally managed dollars, according to SIFMA. Meanwhile, the Forum for Sustainable and Responsible Investment offers data that the change is already underway. From 2012 to 2016, U.S. based impact assets under management more than doubled from $3.74 trillion to $8.73 trillion.
So what’s the best way to approach this opportunity? Two terms you hear a lot are ESG and Impact – so let’s dig into the difference between them.
ESG vs. Impact
Environmental, social and governance (ESG) is a framework for integrating these three factors in the risk/return analysis of investment opportunities. As an investment advisor you can still purchase a security (unless it has been explicitly restricted by your client), regardless of its effect on the environment or society. For example, an advisor might assess the probability that big oil companies’ carbon assets become stranded during their holding period. The resultant probability is incorporated into investment’s cash flow projections and discount rate. If the risk/return output is acceptable to the advisor and within client guidelines, the advisor can make the investment on behalf of their client.