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Impact Investing

Letting Loose the Crazy Uncle

A new report explains how the financial services industry can better harness impact investing to serve client demand.

For all its buzz, impact investing—the practice of investing with the intention to generate measurable social and environmental impact alongside a financial return—remains a relatively niche phenomena. This, despite its headline-generating promises to save the world from the issues created by skyrocketing deficits, uncertain financial markets, and staggering need.

The recent release of a progress update on the UK Government’s efforts to help build the social investment market and a subsequent meeting of the Social Impact Investment Taskforce, revealed that much work remains to build a robust market of impact investment activity.

As Kieron Boyle, head of social finance for the UK Cabinet Office, commented at Impact Economy’s Symposium a few days before the release of the report, critical areas that need further attention include “making it easier to be an impact investor, building capacity amongst social ventures, and opening markets.”

In the financial services industry in particular, various factors are contributing to growing awareness of impact investing, with the prospect of servicing latent client demand (i.e., future business growth) chief among them. This is due in no small part to the projected massive 41 trillion intergenerational wealth transfer between the Baby Boomer generation and their beneficiaries.

A number of financial institutions are utilizing parts of their institutional platforms as a result, but less observable has been a push toward aligning these programs with various organizational functions, including advising, originating, trading, managing, and distributing capital. The fragmentation of practice is raising questions over how to approach these activities and optimally integrate them within a leading global financial institution.

The new special report “Serving Client Demand for Impact Investing: A How-to Guide for Financial Advisors and Senior Management,” produced by Impact Economy in collaboration with the Money Management Institute, explores how major financial advisors and institutions are embracing impact investing. It also suggests how they could go further and optimize both the impact and financial proposition of these kinds of investments by venturing to actually align them, making impact both commercially viable and socially transformative. The report provides a status of the impact investing market and unpacks the motivations, dimensions, issues, and opportunities that investors and firms encounter when creating impact investment programs.

Many of the profiled firms are utilizing components of their institutional platforms—using philanthropy, CRA-motivated lending, ESG and SRI, or wealth management to match client demand or meet compliance requirements. For example, major financial service providers such as Citigroup and Goldman Sachs have either launched impact investment or impact-related investment divisions (the term given to practices that are functionally similar to impact investing) to strengthen or meet corporate citizenship and philanthropic mandates, or invested in impact investment projects to diversify wealth or asset management portfolios by gaining exposure to different sectors, populations, and geographies.

Within a systems framework, though, integrated impact investment initiatives can develop positive feedback loops with core wealth or asset management practices, irrespective of whether they help to meet philanthropic or compliance mandates. This is evident in Morgan Stanley’s new Institute for Sustainable Investing, which offers wealth management clients access to investment products with values alignment, ESG integration, various sector exposures, and impact-specific products. This platform, which resides separately from the other divisions of the bank, is actually preparing the institution for the volume of client demand it anticipates.

Similarly, JPMorgan Chase has a dedicated business unit for impact investing, which is aligned with the firm’s corporate responsibility division and investment bank. In this way, the business can help fulfill the firm’s broader mandate to put its capital, resources, and network to work in advancing solutions to critical social and environmental challenges faced by its stakeholders. According to Bruce McNamer, the head of global philanthropy, this setup “fosters greater collaboration amongst the initiatives within the firm that provide community impacts while leveraging the financial structuring and advisory expertise of its business divisions.”

A seemingly alternative approach is to actually embed impact investing across the divisions of an institution. As Mark Sloss, senior portfolio manager and head of Premier Portfolio Services at UBS Wealth Management Americas commented, “Impact investing should not be cloistered like the crazy uncle in the attic.”

In our experience, integrated impact investment initiatives can position the industry to respond to the financial motivation for impact investing, regardless of the ultimate institutional approach.

Thus perhaps the time has come to let the crazy uncle out. Despite his eccentricities, he is looking more and more like the rich uncle—aligned with the priorities of the soon-to-be owners of $41 trillion in global capital and potentially a harbinger of the future of wealth management.

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COMMENTS

  • BY Brendan Ferguson

    ON June 29, 2014 04:16 PM

    Thanks for this analysis, William.  It’s particularly encouraging to see institutional investors looking to integrate their impact investing functions into mainstream services, which will be necessary if impact investing is to achieve the sort of scale that many have predicted.

    Of course, challenges to the growth of impact investing are not confined to the supply-side.  For a detailed analysis of challenges on both the supply and demand side – albeit in the Australian context – see the following article in the latest issue of the SVA Consulting Quarterly: http://svaconsultingquarterly.com/2014/06/15/grow-impact-investing/

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