Ultra-rich want wealth to make a difference

Many UHNW clients no longer have to be convinced of the merits of impact investing

Sep 20, 2019 @ 1:05 pm

By Jennifer Ayer

The Global Impact Investing Network estimates the current size of the impact-investing market is at least $500 billion, but the potential size of the market is much bigger — as much as $269 trillion according to a recent report from the International Finance Corporation. Ultra-high-net-worth investors will have an important role to play if the impact investing market is to scale up by more than 500 times.

At Tiedemann Advisors, we focus on working with ultra-high-net-worth investors ($25-plus million in investible assets), family offices and foundations, and UHNW impact investors occupy a unique space in the market.

They have enough capital to take more risks with their impact investments than most retail investors, but not enough capital to build out a full family office or foundation complete with an in-house investment team. This means that UHNW investors are often the testing ground for various impact investing products and strategies before they become available to either an institutional or a retail audience.

Here are the three biggest trends that stand out from our conversations with UHNW investors.

1. Investors no longer seem to believe that there is a financial trade-off with impact investments.

We began offering our clients access to impact investments in 2006. In the early days, almost every conversation we had with investors about impact investing ended with the question: "Is there any trade-off between financial performance and social impact?"

But over the last couple of years this question has all but disappeared. Investors generally no longer need to be sold the idea that impact investments are also good financial investments; they want impact investments for both the financial returns and the social returns.

This is true even of investors who may not self-identify as impact investors.

While the trade-off debate may never be fully settled (after all, there are still below-market-rate impact investments), an increasing number of UHNW investors are sufficiently convinced that impact investments have a place in their portfolios.

2. Investors want to understand the social impact of their investments.

One of the most hotly debated areas within impact investing is identifying the best approach to impact management and measurement. While there still isn't a sole overarching standard for impact measurement, there has been tremendous progress in the form of different tools and frameworks, including those offered by the Sustainability Accounting Standards Board, the U.N. Sustainable Development Group and the Global Impact Investing Network's IRIS+.

[Recommended video: How the 2020 elections could impact ESG investing]

At Tiedemann, we treat impact reporting just as we do financial reporting, to give investors a holistic picture of their investments. Every impact report is customized according to the client's needs and typically includes the following information:

• A "snapshot" of an investor's total impact exposure at the portfolio level;

• A review of the impact data being measured (e.g., carbon emissions, gender diversity, etc.);

• Brief case studies, including qualitative insights, on how an investor's capital has translated to on-the-ground impact.

While some of the impact metrics may be imperfect and difficult to compare across different types of investments, we find clients enjoy seeing how their capital is making a tangible impact in the world around them. The key is to be consistent in our measurement and reporting so that clients can track progress over time.

3. Investors are increasingly interested in diversity, equity and inclusion.

Finally, we are seeing an explosion of interest in impact investments and strategies that prioritize diversity, equity and inclusion.

We credit this increased interest in equity and inclusion investments to a few factors. One, there is a growing body of evidence that companies and fund managers that are more diverse tend to outperform their peers.

Also there is a heightened awareness of income and socioeconomic inequality among UHNW investors, who are determined to help close these gaps and create more opportunities. In a sign of the changing times, as of July 2019, every company in the S&P 500 had at least one female director.

[Register now for our ESG & Impact Forum at the U.N. on Dec. 5.]

We see these three trends contributing to the overall evolution of the impact investing market. While UHNW investors are a relatively small investor segment, they can play a big role in helping to get different types of impact investing strategies and approaches off the ground.

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