Methods to create social change are shifting. It used to be the case that only philanthropic money and charitable donations are given to assist communities in need. Now, private investors and companies are using impact investing to drive social change, providing more money than philanthropy and government can afford.
Two months ago, Morgan Stanley Smith Barney announced an Investing with Impact Platform for their clients. In the past few years following the 2008 financial crisis, there has been a surge of banks from the US to Europe who have launched impact investing products. These products constitute a new investment style that allows clients to generate both financial and social or environmental returns. Compared to charity, impact investing would help accelerate solutions faster and ensure long-term sustainability.
But traditionally concerned with only achieving financial returns for clients, why the sudden interest from wealth management firms?
Perhaps one answer is the attractive potential for profit. A report by J.P. Morgan, Rockefeller Foundation, and the Global Impact Investing Network estimates that the potential profit for impact investors across just five sub-sectors of inclusive business – affordable urban housing, primary education, maternal healthcare, clean water for rural communities, and microfinance – could range between $183 billion to $667 billion over the next ten years, and invested capital between $400 billion to $1 trillion.
There is also a consumer appetite for making sure that investment decisions align with personal values.
“Our clients have been increasingly telling us that this is what they want. They really want to be able to apply their values. When we designed the platform, we thought that our comparative advantage was really around being able to bring clients products that were financial first, because that’s what they’ve come to expect from Morgan Stanley – that we would be absolutely rigorous on risk, rewards, financial returns – but also providing social impact,” said Audrey Choi, Head of Global Sustainable Finance at Morgan Stanley.
Some suggest the time is ripe for impact investing. There is a shift in doing less convincing and more educating and discussion. Those who have never tried before are taking a piece of their portfolio to try it.
“We’re already at that mindset of understanding that wealth can have an impact on social and environmental issues,” said Patricia Farrar-Rivas, CEO of Veris Wealth Partners.
Despite the growing amount of interest in impact investing, experts are concerned about the perceived size and profitability of the market versus what is reality. Monitor Institute identified three key challenges to the industry: lack of efficient intermediation, lack of enabling infrastructure, and lack of impact investing opportunities.
In reality, there is high search and transaction costs, fragmented supply and demand, small and complex deals, lack of understanding of risk, no infrastructure for people to function as part of the industry, and a shortage of quality investment opportunities for large amounts of capital to be placed at investors’ required rates of return. The last barrier reflects a growing industry with initiatives that need smaller amounts of early-stage capital, and is why some argue a more practical approach to helping these startups is philanthropic capital, with impact investing taking on a long-term role.
As of now, certain steps can be taken to address some of these realities. Margot Brandenburg, Associate Director of Rockefeller Foundation, suggests establishing infrastructure to support impact investment. One suggestion is financial and non-financial reporting standards as well as performance standards – namely measurement tools to make sure the investment is really being allocated for social impact and financial returns. Another is to build networks of investors and service providers to learn from one another and share information.
Though impact investment will take some time to grow, Mario Marconi, Head of Philanthropy and Values-Based Investing at UBS, offers ideas to defragment supply and demand.
“We see wealth managers starting to embrace impact investment now. However, it will still take a long time before we see impact investment part of every kind of portfolio, which is our vision at UBS. The reason why it will take time is because we are talking about introducing a new investment style, and this is a process which takes time,” said Marconi.
“We need to work both on the demand side and the supply side, while at the same time creating a true marketplace. On the demand side, short term priorities for private banking is about educating investors and make sure that impact investing is part of the portfolio discussion. On the supply side, it’s about finding scalable solutions and therefore, compelling investment opportunities. I would argue this is the number one priority for the sector today.”
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