The challenges and opportunities of impact investing

While the field is still in its early years as a mainstream phenomenon, the transition represents a fundamental and irreversible shift

Mar 1, 2015 @ 12:01 am

By David Sand

In recent years, the term impact investing has mushroomed to encompass the older labels of SRI (socially responsible investing), MRI (mission-related investing) and ESG (environment, social, governance), among others. Those of us in the field can parse the terms and highlight distinctions that differentiate the various strategies, but at a big picture level, the headline is that change has come to the investment industry.

While we are still in the early years of impact investing as a mainstream phenomenon, the transition represents a fundamental and irreversible shift.

As a money manager, I see the expanding interest in impact as both a challenge and an opportunity. Advisers and their clients looking to get into impact investing face similar challenges and opportunities. Here are the key issues advisers need to consider:

Product proliferation The number of firms dedicated to impact investing is growing, as is the number of impact investing products offered by mainstream firms. Research and due diligence are critical for any investment decision and take on greater significance when an adviser must evaluate impact along with risk and returns.

(More: BlackRock expanding efforts on impact investing)

Platforms The major wirehouses and many of the independent RIA networks have developed impact investing platforms that facilitate adviser and client entry to impact. In classic Wall Street fashion, firms are now competing with one another to see which can raise the most impact assets.

Transparency The impact investing umbrella is big enough to cover many strategies. Some strategies see impact as avoiding (or negatively screening) investments in certain categories while others consider impact to be a positive approach with ongoing evaluation and reporting over the life of an investment.

Divest/Invest The global debate over investments in fossil fuels is influencing the investment universe in ways far beyond a checklist of who does or doesn't adopt a less carbon-intensive portfolio approach. The very act of asking about the environmental consequences of portfolio decisions and holdings leads to a process of thinking about impact and impact investing.

Model portfolios In the spirit of fund of funds and manager of managers programs, firms are offering model portfolios that provide impact investment opportunities horizontally across asset classes.

(More: Impact investing a potential trap for the unwary)

New vehicles, new paradigms While it's seemingly separate from the impact investing arena, much of the innovation in financial services has direct connections to investors' choices for the future. Members of the millennial generation, in particular, are as likely to look at B corporations, pay for success bonds, crowd-funding, social enterprises and social entrepreneurship as they are to consider traditional investments — impact or otherwise.

Information and empowerment In the 21st century, advisers must be ever mindful of the amount of information and data available to clients via the internet, social media and other sources. The day of DIY impact investing is probably not far off, and advisers should avail themselves of all the resources currently available to help meet client interests and needs.

David Sand is chief investment strategist at Community Capital Management Inc.


How are you incorporating impact investing into client portfolios?

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