Many advisors are still hesitant to jump into impact investing. We asked Managing Partner at TriLinc Global, Joan Trant, to share her thoughts on this increasingly talked about approach to investing.
An Interview with Joan Trant of TriLinc Global
Q: Joan, do you see Impact Investing as a time-sensitive fad or a paradigm shift that is changing the way investment managers and investors allocate capital?
A: The evidence is clear that impact investing – deploying capital to achieve market-rate returns alongside positive social, economic, and environmental progress – is an established trend with strong capital markets support. Many factors are driving impact investment strategies, often complemented with environmental, social, and governance (ESG) screening, including these broad themes:
Impact investments exhibit potential for non-correlated diversification, an important risk mitigation strategy. In many cases, impact investments are “alternative investments,” deployed into private companies and often into certain geographies that do not track to public equity and debt markets in the U.S., Western Europe and other developed economies. Since the investments are not publicly traded, they are not subject to market swings or investor sentiment.
ESG and impact screening are gaining recognition as a means to identify risks – without sacrificing returns – that traditional analytics based solely on financial factors may not anticipate. An analysis of 2,200 studies during 1970-2015 on the relationship of ESG and corporate financial performance indicates that companies with good ESG performance generate comparable returns to those not targeting sustainable business practices. Studies by Harvard Business School and Morgan Stanley on investment performance from the 1990’s to the present corroborate the return findings and also demonstrate that compared to their non-screened peers, ESG-screened companies exhibit less pricing volatility. Low volatility is a positive factor in portfolio construction.
A substantial and growing volume of assets is already being managed using a “sustainability” lens. Half of global assets – $62 trillion – is controlled by asset managers or owners who are signatories to the UN Principles of Responsible Investment, and who commit to upholding good ESG practices in supply chain, production, water and waste management, and human resource management. Financial services leaders, including Bloomberg, Citi, Ernst & Young, J.P. Morgan, Morningstar, and MSCI, are incorporating sustainability into analysis and asset management.
Women, Gen X (born 1965-76) and Millennials (born 1977-95) are primary wealth creators and inheritors, and they seek to align investments with their values. Research shows that 76% of women believe it is important to view investments through the lens of their impact on society and the environment. Almost 73% of Millennials, the largest generation in history, expect wealth managers to screen investments for ESG factors. Women in the U.S. currently control $11.2 trillion in assets, and along with Gen X and Millennials will inherit $30-41 trillion during the baby boomer wealth transfer. J.P. Morgan estimates that demand for impact investments will grow in to $1 trillion by 2020. Combining these data points with the sustainability focus of mainstream companies and financial services firms outlined above, it is reasonable to project that supply and demand for ESG/impact investments will increase, and they will converge with traditional investment approaches.
ESG and impact criteria can serve as a tool for identifying upcoming industries and companies. These may include clean and renewable energy, electric cars, affordable housing, and low-energy use buildings, among others.
Global demographics (population growth, rural-to-urban migration, rise of the middle class in developing economies) and other factors such as climate change are driving corporations, entrepreneurs and investors to develop new technologies and distribution channels to capitalize on market-based responses to domestic and global trends. United Nations Member States have adopted the Sustainable Development Goals (SDGs), which promote initiatives such as education, clean water, and food productivity. The goals explicitly engage the private sector, and according to Ethical Corporation’s “State of Responsible Business Report 2016” 50% of all companies across the globe have adopted the SDGs as well. While aspirational, the SDGs make economic sense, too: the 4 billion people living at the base of the socioeconomic pyramid control $5 trillion of consumer spending, highlighting the investment potential of many SDG targets.
Q: Why do you think it's important to make the distinction between fad and paradigm shift?
A: The distinction is vital for Financial Advisors and the investors they seek to serve. According to US SIF, sustainable investments in the U.S. by asset owners and their investment advisors total $8.72 trillion, or 22% of assets under professional management. Moreover, this trend exhibits a high growth rate at 33% during 2014-2016. Financial Advisors who develop expertise in impact investing can be better prepared to meet their clients’ financial goals. Additionally, Advisors may find that impact investing know-how creates an opportunity to attract new clients, and to retain existing clients and their heirs throughout the wealth transfer process.
Q: Dispelling the notion among many Financial Advisors that impact investing is a fad, based on the belief that it requires a trade-off in financial returns, is difficult. How can we work towards dispelling that notion?
A: I believe the solution lies in the data and in the ongoing professional development of Financial Advisors in serving their clients. As for the data, we need to help Advisors access market studies that debunk the myths surrounding impact investing, such as the Morgan Stanley study of 10,288 mutual funds during 2008-14, which found that sustainable mutual funds (those investing in companies that incorporate ESG into their business practice) produced equal or higher median returns, with lower volatility, for 64% of the periods studied. TriLinc Global and our peers post many of these studies on our web sites, and we need them to be as accessible to Advisors as financial analysis reports.
We also need to provide avenues for Financial Advisors to learn more about investment selection, due diligence, and monitoring of sustainable/ESG/impact investments. ImpactU plays an important role in building awareness and knowledge. Thank you! Presently, over 135 colleges and MBA schools across the U.S. offer sustainability curricula. Industry associations, such as the Chartered Financial Analyst Institute and the Chartered Alternative Investment Analyst Association, have issued publications on sustainable investment analysis and host ESG training sessions. For our part, TriLinc Global is committed to sponsoring investment products that seek both competitive yields and positive impact, to educating Financial Advisors on ESG and impact, and to continuing our leadership role in industry-building, productive partnerships, and talent development.
Joan’s detailed research and strong industry experience solidify impact investing as a paradigm shift that is the future of investing. For more information on impact investing, you may visit www.trilincglobal.com.
Watch some video interviews with Joan on Impact U
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About Vanderbilt Financial Group: Founded over 50 years ago in 1965 and located in Woodbury, NY, Vanderbilt Financial Group is the Entrepreneurial Broker Dealer known as the Sustainable Broker Dealer and RIA committed to investing with purpose. Vanderbilt is a full service Broker Dealer and Advisory firm with a focus on Impact Investing. Vanderbilt's refreshing, unique, and innovative culture is a driving force to constantly strive to positively impact their community.