Every so often, it’s great to get some motivation from the top. We were honored that our CEO Stephen Distante was able to speak with internationally recognized thought leader Jed Emerson, an impact investing strategic adviser known for his work helping individuals and institutions seeking to leverage the greatest financial, social and environmental impact from their investments. His words give us great insight into the meaning and purpose of capital and how financial advisors can best integrate impact investing into their practice.
Distante: What are the issues that you’ve seen advisors have to advance beyond in order to be effective in working with clients on impact investing?
Emerson: The first idea that advisors have to recognize as false is the notion that because you are doing impact, ESG, or sustainable investing, you will have to accept a lower financial return.
That hasn’t been the case. If you look at the academic literature that has reviewed performance over time, the reports and the meta-studies that roll up other studies, show you may not necessarily outperform financially—the jury is still out on that question—but you won’t underperform. That is because of the fact that you can probably still pick bad strategies with these types of assets, just as any others.
Just because your goal is to do good doesn’t mean you will necessarily do well.
That said, people may opt to take a below market return so they can participate in philanthropic or below market lending-- but you don’t necessarily have to do that. For example, if you have a particular nonprofit strategy they are interested in supporting, you get a tax break but you don’t get a principal return. That said, there are also a variety of fixed income debt and equity strategies that offer financial returns competitive with those asset classes.
The other misperception is that impact investing eliminates investments from consideration. While some socially responsible strategies do opt to screen out “bad” companies, overall impact Investing is additive as opposed to reductive. You’re still using financial analysis to assess opportunities, but you are adding a level of consideration as to social, governmental, and environmental factors to that analysis. So you would still look at the fundamentals from a financial and economic perspective (just like any other investment) but you are adding consideration to off balance sheet risk and opportunity represented by companies who anticipate how certain environmental and social factors may effect their businesses.
Distante: What would you say to Millennials who see impact investing as a way to build their practice?
Emerson: We have to be careful to not paint with too broad a brush and make statements about an entire generation. Now that said, surveys of Millennials have shown that they do care a great deal about environmental and social performance of companies.
As I understand the data, they tend to be a little more conservative when it comes to investing. Impacting investing can work well for millennial investors who perhaps will participate in for example community lending where this is a long track record of strong performance.
Millennials came of age in the financial crisis and the recession that followed. They graduated into a job market that was challenging and saw their parents lose 30% of their wealth. It’s almost like the effect of the parents of Baby Boomers who went through the Great Depression.
One more thing that people need to understand is that you think initially a lot of impact investing was only available to ultra high net worth investors who could afford high minimums and customized approaches. Over the last 5 to 10 years, we’ve seen the introduction of a new variety of vehicles where people can invest for as low as $250. This makes it increasingly accessible for folks who want to explore what impact investing is but may not have the type of wealth to invest directly in private equity and venture funds.
Distante: Do you think this will fade over time as Millennials grow older and perhaps become less progressive in their thinking?
Emerson: It is a misperception to view impact investing as a “fad.” This type of investing has evolved over the last 20 or 30 years and have been with us since the beginning of capitalism.
In fact, look at the Dutch East India Company in 1604, the first publicly traded company: It was discovered that the captain of the expedition had engaged in piracy and as a result several shareholders sold their shares to protest the actions of the company while other shareholders engaged in a campaign against the board.
These ideas and types of engagements regarding social and other practices have been with us since the start of capitalism itself.
The other thing is that impact investing is a broad banner that has underneath it a broad array of strategies that range from screening out bad things from your portfolio to the idea of how to actually use capital to create positive change. These diverse approaches to investing will only continue to evolve and change to meet developing investor interest and demand.
Distante: In your experience, when you’ve seen financial advisors convert to impact investing, what has been the catalyst?
Emerson: One has been the curiosity and demand from clients. Surveys say that 60-70% of investors would like to use impact investing as part of their approach.
The other catalyst is the way impact investing is material to corporate performance over time. If you are investing for the long run rather than day trading, issues around how a company manages its employees, its supply chain, and the opportunities to improve their sourcing practices, these are all things we’re becoming aware of as having a real effect on financial returns over time.
And this is a hugely growing trend. We’ve seen an increase in SOCAP attendees to where over 3,500 folks were registered for this year’s event.
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