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Intelligent Advisor

What You Need to Know About Impact Investing

Impact investing products have moved from boutique origins into the mainstream of global investment. Powerful international coalitions promote the disciplines, the world’s most influential philanthropists demonstrate its use, and investor demand is accelerating, said Christopher Geczy, academic director at the Wharton Wealth Management Initiative. Advisors should have some knowledge of the subject if they want to talk to their clients intelligently about it.

Speaking at IMCA’s (Investment Management Consultants Association) annual conference in Orlando, Fla. on Monday, Geczy gave a comprehensive and detailed overview on impact investing. Here’s what you need to know about it:

  • The goals of impact investing are often very ambitious, and some investors seek to promote transformational global change, with or without accompanying profit. Other investors have modest goals: They want to participate in markets without compromising their moral or social values.
  • Impact investing can take many forms: socially responsible investing (SRI), shareholder activism, corporate social responsibility, microfinance (funding entrepreneurs, microbanking and microinsurance) and environmental finance (green finance, climate change mitigation and clean tech).
  • Socially responsible investing (SRI) represents 18 percent of invested portfolios in the U.S.; there are $6.6 trillion in assets in these investments.
  • From 1995 to 2013, SRI grew at a compound annual rate of 13 percent. In the two years ending 2013, it grew 76 percent.
  • SRI used to be characterized primarily by negative screens, such as alcohol, tobacco, gambling, firearms or pornography. Today, the trend is to use positive screens, such as renewable energy, community investment and shareholder activism.
  • In the last several years, the social investment agendas of many investors have been shaped in consideration of environmental, social and governance (ESG) factors. From 1995 to 2014, the number of funds incorporating ESG factors grew from 55 to 925. Net assets grew from $12 billion to $4.3 trillion; 66 percent of SRI assets are managed within funds that use ESG criteria.
  • Many SRI investors have seen good risk-adjusted returns. But in the aggregate, there is some financial cost to using SRI strategies. According to Geczy’s research, the average non-socially responsible mutual fund will cost 1.1 percent a year, compared to 1.36 percent for the average SRI fund.
  • Geczy surveyed 53 funds who self-identified or contained impactful portfolio companies. About 66 percent of them said they were looking to achieve market-rate returns. The rest targeted below-but-close-to market rates or capital preservation.
  • Wealthy individuals are increasingly providing the capital for impact ventures. HNW individuals, families and retail investors provide 32 percent of total impact capital, according to a survey by J.P. Morgan and Global Impact Investing Network. 
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