By Reid Thomas
Everyone’s talking about impact investments—but there needs to be more discussion of the actual impact.
While inspiring stories about fund managers and how funds are deployed used to be enough, the next wave of investors are looking for funds that go beyond surface chatter. They want funds and fund managers who can effectively articulate the good that their investment does.
This includes older investors who, contrary to popular belief, have as much of an appetite for impact investing as their younger counterparts, despite some prevailing narratives. That’s clear in a new report from Morningstar that finds millennials, members of Generation X and baby boomers have nearly the same level of interest in impact investing.
This bears out in my own, firsthand experience and in discussions with fund managers. They see an aging population with capital tied up in investments and assets that aren’t having enough of a tangible impact on the world to suit them. They want to leave a legacy they can be proud of, and it is important to remember that the vision of these older investors guides many family offices, who are also interested in social impact.
“Impact investing is becoming a heated trend in the family office community, with about a third of family offices now engaged in it,” Rebecca Gooch, director of research at Campden Wealth told The Financial Times. An important side effect of this trend is that work surrounding impact causes has made millennial family members become more interested in joining the family offices.
But whether it’s those running the offices or the investors themselves, there is a keen awareness that recent incentives—around Opportunity Zones, for instance—have more clearly moved impact investing away from being stereotyped as a low-return affair. For an aging investor, the tax benefits are especially compelling because they will, upon his or her passing, carry on and not trigger an immediate tax event.
Articulating social impact is not only about measuring an investment’s good in the near term but showing (particularly older) investors how their capital can leave its mark long after they’re gone. Fund managers who may be used to younger investors forking over their cash for social impact will have to increasingly gear their pitches toward an aging generation that, already in retirement, has less willingness to take on risk, less time to make investment decisions and more skepticism about social impact.
None of this is easy. A recent report argues that, though impact investing has increased promise, “it is difficult to identify in advance which social programs will work,” and an article in the Journal of Sustainable Finance & Investment suggests that the social impacts of these investments are underresearched. Simply put, we are still at a point where determining impact investing is a challenge. Ratings, metrics and data have of course boomed in the past 20 years—and new ones, measuring social impact, are on the horizon—but they lack comprehensiveness, as organizations lack a uniformity in what, exactly, is being measured.
This means, despite the general interest, fund managers need to find ways to show, not tell, older investors that their investment will make a difference. Take Opportunity Zones for an example. Although the government is not requiring funds to report any social impact tracking, investors want to see it. Fund managers should be transparent, making sure all material information is available and accessible. Investors want to know where their money is and how it is being used.
The demand for impact investment opportunities is there, so it is wise for fund managers to provide solid and well-researched evidence to potential investors. As impact investing becomes increasingly more mainstream, the true differentiator for fund managers will not simply be the option itself, but their ability to tell investors both young and old exactly what good they’re going to do and how it’s measured.
Reid Thomas is executive vice president and general manager of NES Financial and leads the fintech’s focus on technology-enabled Opportunity Zone, EB-5, and 1031 fund administration.